Stocks Soar On EU Bailout

Monday, May 10, 2010
Market Commentary:

Stocks surged around the world after European policy makers announced a $1 trillion bailout package designed to end the region’s sovereign-debt crisis and save the euro. Volume totals were reported lighter on both the NYSE and on the Nasdaq exchange compared to Friday’s very high levels. Advancers trumped decliners by more than a 10-to-1 ratio on the NYSE, and by a 7-to-1 ratio on the Nasdaq exchange. New 52-week highs outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange. There were 7 high-ranked companies from the Leaders List that made a new 52-week high and appeared on the BreakOuts Page, higher than the 0 issues that appeared on the prior session. Waning leadership has been evidenced by the recent lack of stocks making new highs as the rally came under pressure.

Hyperinflation on Europe’s Horizon? The Market Might Think So…

Over the weekend, European governments agreed to lend as much as 750 billion euros (nearly $1 trillion) to the most-indebted countries in the region. The European Central Bank said it will counter “severe tensions” in “certain” markets by purchasing government and private debt which is a direct contradiction to what they said last week before Thursday’s madness. The EU has decided to fight contagion instead of inflation which is a concern for many market participants because history shows us that when central bankers print excessive amounts of paper, inflation surges. 

The most recent example occurred over the past decade in Zimbabwe. After a series of ominous policy decisions, including defaulting on their IMF loans, Zimbabwe entered a period of hyperinflation. Figures from November 2008 estimated Zimbabwe’s annual inflation rate at 89.7 sextillion (1021) percent. By December 2008, inflation was estimated at 6.5 quindecillion novemdecillion percent (65 followed by 107 zeros). In April 2009, Zimbabwe’s currency collapsed when the government stopped printing the Zimbabwean dollar, and started using the South African rand and US dollar as their standard currencies for exchange. The government does not intend to reintroduce their currency until the second half of 2010. Will Europe suffer the same fate? Hopefully not, but the fact that the euro negatively reversed today (opened higher and closed lower) on what would normally be considered bullish news suggests market participants are not “happy” with the results. In addition, last week alone, a whopping $3.7 trillion was erased from the value of global stock markets which illustrates how quickly massive amounts of capital can “disappear.”

Market Action- In A Correction:

The technical action in global equity markets is not promising. At this point, several European stock market’s have fallen over -20% from their 52-week highs which technically defines a bear market. The major US averages are all trading below their respective 50 DMA lines which is not healthy. It was also disconcerting to see volume dry up on Monday as the major averages “bounced” from egregiously oversold levels, which usually suggests massive short covering, not new buying efforts. A host of leading stocks closed near their lows after a very strong open which is a subtle, yet important, sign of distribution. However, if this market resolves itself and wants to go higher, we will need to see a proper follow-through day (FTD) emerge before a new rally can be confirmed. 

Day 1 Of A New Rally Attempt:

Monday marked Day 1 of a new rally attempt which means that as long as Monday’s lows are not breached the earliest a possible FTD could emerge will be Thursday (Day 4). In addition, if Monday’s lows are breached then the day count will be reset.  Taking the appropriate action on a case-by-case basis with your stocks prompts investors to raise cash when any holdings start getting into trouble. Trade accordingly.

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