Tuesday, November 29, 2011 9: 16 am EST
DJIA: 11,523.01 S&P 500: 1192.55
OK, we got a strong stock market rally based on news that serious efforts are underway in Europe to stabilize the euro-zone’s banking and sovereign debt problems. This was needed before any meaningful attempt by the stock market could get underway. If the Europeans blow it this time, the stock market will resume its decline searching for a level that discounts new negatives.
It’s important that investors are aware there are institutions and people out there that are betting the Europeans CANNOT save the Union, and they will flood the TV, radio, print and social media with every truth and untruth they can concoct. One flamboyant derivatives manager on CNBC this morning was negative on everything and even found fault with Black Friday’s record sales. Before switching channels, I concluded that this guy was short and worried the market was turning against him. On another channel, a money manager was proud to be short European bonds reasoning the Europeans simply won’t go far enough to correct their bank and sovereign debt problems. Actually, he was very impressive, but just because the Europeans have dawdled with this issue in the past is no guarantee they will continue to drag their feet. This is now a sink or swim situation with all the marbles at stake.
That said, what’s my point ?
When the stakes are high enough, people in power dig in their cleats and do what has to be done. They did it in late 2008 and early 2009 when the U.S. economy and stock market was on the brink of meltdown. Unfortunately, they often wait until the late innings to do the job.
This has been a news sensitive market with impact coming from fears of another recession, Congressional dysfunction and U.S. default and the potential dissolution of the European Union, examples follow.
Negative news (and opinion) about Europe preceded Monday’s rally:*
Euro Zone Needs Momentous Deal (Credit Suisse Nov.21)
Germany Sees No Bazooka in Resolving Debt Crisis as Spanish Yields Surge (Nov. 22)
European Stocks Drop as Euro Area Borrowing Costs Rise; Commerzbank Slumps (Nov.22)
France’s AAA Status in Tatters as Yields Surge (Nov. 22)
Germany Fails to Receive Bids for 35% of 10-Year Bonds Offered at Auction (Nov. 23)
U.S. Stocks Fall as European Bond Risk Climbs to Record Amid Credit Crisis – Nov.23)
Suddenly the headlines changed:
ECB and Germany Should Define the Rules of Their Game – (Nov. 24)
Germany, France to Propose Treaty Amendments (Nov. 24)
European Union May Shield Banks from Costs for Guarantees During Crisis (Nov. 25)
IMF Readying Loan of as Much as $794 Billion for Italy, La Stampa Reports (Nov.27)
Central Banks Ease Most Since 2009 to Avert Impact of European Debt Crisis (Nov. 27)
France Sees Budget Rules Paving Way for ECB Support (Nov.27)
Euro Rescue Fund May Insure 30% of Bonds to Help Fight Crisis (Nov. 27)
The market rebounded on Monday, Nov. 28.
As the stock market attempts to recoup the losses incurred since November 11, negative headlines will continue like Monday’s “Banks Step Up Warnings on Euro Breakup as Moody’s Sees Ratings Threatened.” What’s important here is not so much how bad things are, we’ve been warned relentlessly about that. The key is that the problems are now being addressed seriously.
CONCLUSION: Near-term, I see the potential for a further move up to DJIA 11,750 (S&P 500: 1214). The good news is European leaders have been driven to take action to preserve the European Union as the crisis escalates. The bad news is, that their actions will be taken in face of a continuing flow of bad news as rating agencies threaten to slash ratings, leaders disagree, and interest rates edge up. This has the makings of a cliff hanger. What makes the Euro-dilemma scary is the Street doesn’t really know what the outcome would be if the Union fails, or nearly fails.
That is what makes “buying low and selling high” so difficult. The best prices are right smack in the middle of the ugliest news, when no one in their right mind would buy.
The best “read” of the validity of the rebound that started yesterday would be gained from an attempt to decline today. Failure to follow through says there is room to run. Support is DJIA 11,360 (S&P 500: 1174).
Super Committee: While the committee failed, I am keeping this up FYI, since it will continue to get press coverage.
Nov. 23: Deadline for both houses to vote on a plan with a 10-year deficit reduction goal of $1.5 trillion Dec. 2: Deadline for committee to submit report and legislative language to President Obama and Congress. They blew it !
Dec. 23: Deadline for both houses to vote on committee bill – There’s none to vote on.
Jan. 15, 2012: Date that the “trigger” leading to $1.2 trillion of future spending cuts goes into effect if
the committee’s legislation has not been enacted.
Feb. 2012: Approximate time when first $900 bn of debt ceiling runs out.
Feb./Mar.2012: Deadline for Congress to consider a resolution of disapproval for the second tranche
($1.2 – $1.5 trillion) of debt limit increase.
Fall/Winter 2012: When additional $2.1 - $2.4 trillion of borrowing authority from this law runs out.
Jan.2, 2013: OMB orders sequestrations for defense and non-defense categories of spending necessary
to meet spending cuts required by the “trigger.”
Recent blog headlines:
Nov. 2 DJIA: 11,637, “Risk-Taker’s Buy Shaping Up”
Nov.3 DJIA: 11,836, “Again – It’s All About Europe”
Nov.4 DJIA: 12,044, “Easy Does It ! Traders to Take Some Profits”
Nov. 7 DJIA: 11,983, “SuperCommittee Will Soon Take Center Stage”
Nov. 8 DJIA: 12,068, “Stock Market Hanging Tough – Would Love to Run…. but…”
Nov. 9 DJIA: 12,170, “Italy’s Turn to Crunch Prices, But the SuperCommittee is in the On-Deck Circle”
Nov. 10, DJIA: 11,780, “ OK Greece and Italy – Cut the Crap – Decision Time !”
Nov. 11, DJIA: 11,893, “Potential for an Upside Breakout Looms, Absent New Negatives”
Nov. 14, DJIA: 12,053, “SuperCommittee and Economy Taking Center Stage”
Nov. 15, DJIA: 12,078, “European Outlook Tentative – U.S. Outlook Picking Up”
Nov. 16, DJIA: 12,096, “Europe – Surprise Us for a Change – Get the Job Done !”
Nov. 17, DJIA: 11,905, “Time for European Leaders to Avert Contagion – European Central Bank to the Rescue ?”
Nov. 18, DJIA: 11,770, “Stock Market a Coiling Spring ?”
Nov. 21, DJIA: 11,796, “Occupy Washington”
Nov. 22, DJIA: 11,547, “Uncertainty Rules – But Trader’s Opportunity Looms Wednesday Morning Early”
Nov. 23, DJIA: 11.493, “Darkness Before the Dawn ? Germany Starting to Feel the Heat”
Nov.25, DJIA : 11,257, “Europe, Where Art Thou ?”
Nov. 28, DJIA: 11,231, “Finally ! The European Leaders Act”
The writer of Brooksie’s Daily Stock Market blog, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions
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