The endgame in Europe appears to be at hand, and the successful or unsuccessful resolution of this crisis will determine the investment climate going forward.
On My Wall Street Radar
In the chart above, we can see how the impressive rally of the last ten days stalled right at the critical resistance level of 1225 on the S&P 500 (NYSE:SPY) and this reflects the global uncertainties now being faced.
We are still in a down trending bear market that is below its 200 Day Moving Average, however, a break above current levels this week would lead to higher prices ahead. This is the third test of this level and failure here would indicate more downside in store for major U.S. indexes (NYSE:SPY) (NYSE:DIA)
Most of this rally has been on low volume which would indicate short covering rather than participation by large institutions and with pressure on the financial sector (NYSE:IYF) (NYSE:XLF) the sustainability of the rally is unknown.
The Economic View from 35,000 Feet
The economic view remains decidedly cloudy as we head into the second half of October.
The well regarded ECRI (Economic Cycle Research Institute) indicates that the U.S. economy is at a 57 week low and in late September announced that the U.S. was heading for a recession that government policies wouldn’t be able to stop.
Retail sales were up while consumer confidence was down and unemployment remained flat. The Fed meeting minutes revealed discord among participants while small businesses remain negative towards the future outlook.
But the big story, as it has been for what seems like years, is Europe and the crisis in Greece.
The end game seems to be at hand as the G20 this weekend pushed for a final solution to this crisis and leading nations like the U.S. and Australia rebuffed efforts to expand the International Monetary Fund reserves.
The markets didn’t like this outlook as French bond yields soared by nearly 40 basis points last week, the highest since the Euro was founded while Greek 1 Year yields are at 165% which would be a heck of an investment if the country doesn’t default.
Things look like theycould definitely become “uncontained” across the continent as S&P has downgraded Spain on Thursday and Fitch went on a ratings downgrade rampage of major banks UBS, RBS and Lloyds and put a dozen or so global banks on “watch negative” including big names, Barclays, Credit Suisse. Societe Generale, BNP Paribas, Bank of America, Morgan Stanley, Goldman Sachs and Deutsche Bank.
In Greece a general strike is planned for Wednesday and Thursday to protest new austerity programs and the anti-capitalist demonstrations that started on Wall Street are spreading around the world.
This Week’s Important Business and Fincancial News and Economic Reports
Lot’s of economic news this week coming everyday including Industrial Production on Monday, inflation reports and housing market data on Tuesday and Wednesday, jobs on Thursday and leading indicators and the Philadelphia Fed report on Friday.
Significant earnings reports will come from IBM, Citigroup and Wells Fargo on Monday, Apple, Bank of America, Goldman Sachs, Intel and Yahoo on Tuesday and Morgan Stanley on Wednesday.
Bottom line is that the global economy continues to stagger near the precipice of recession and many global markets are now in bear market territory. The financial sector (NYSE:IYF) is wobbling and under extreme pressure and it’s a period of heightened danger, both on a technical and fundamental basis. We can expect more volatility ahead.
The action in Europe this week and through next weekend will set our course beyond this historic crossroads. Resolution could lead to more global stability and potential resolution of this financial crisis while any missteps on the part of European leaders or further spreading of the contagion to especially Italy and Spain could bring on a “Lehman Event” that would be international in scale.
Disclosure: No positions in ETFs or stocks discussed in this article.
John Nyaradi is the author of The ETF Investing Premium Newsletter.