Was Yesterday’s Reversal a Major Signal?

I probably don’t have to tell you there’s pretty strong resistance at the 1,225 level on the S&P 500. Yesterday was the fourth consecutive day the index hit that level and failed to move higher. So the big reversal for stock prices yesterday shouldn’t be seen as a major bearish development.

At the same time the S&P 500 is backing off from resistance, the tone of the media coverage on the European debt situation has gone from optimistic to pessimistic.

Since last week, we’ve been hearing that France and Germany are close to an agreement on how to recapitalize the banks. We also heard that the two countries were in agreement that the ESFS bailout fund need to be raised to two trillion euro.

Today, of course, one day ahead of an EU summit, Germany and France are at odds again. Rumor has it that a French official wants the ESFS to take the form of a bank. The Bloomberg headline reads: "France and Germany Split on Crisis Solution." Reuter’s says that the "Euro zone rescue plans shrouded in doubt."

Like I said yesterday, any time things look positive, you can count on some Euro-official to say something to undermine the process.

There’s a new term to describe the condition among investors who are sick of hearing about Europe: Euro-fatigue. I can imagine that Daily Profit readers are not immune, given my constant discussion of the matter.

But the truth is: the EU situation is the biggest catalyst for the stock market. Get it out of the way before too much damage has been done, and stocks have a great chance for a string rally into the end of the year. Screw it up, or drag it, and the market will get ugly.

And so, this is how we get into a range-bound market that can’t take out 1,225. The action over today and tomorrow should be interesting. I don’t know how you get positioned ahead of the EU summit, but TradeMaster Daily Stock Alerts analyst and editor Jason Cimpl does. The stock market could launch on Monday, it could tank, or it could be flat. All depends on what Europe does…

It’s not that we have a break in earnings season, but there is a definite lull. The only really important reports are American Express (NYSE:AXP) this morning and Microsoft (Nasdaq:MSFT) this evening. American Express beat, and I think Microsoft will, too. But these two aren’t as influential as the reports we’ve gotten thus far.

Additionally, there is a rumor floating around that Microsoft may once again try and acquire Yahoo! (Nasdaq:YHOO). If the price is right, I suppose it could make sense. But I’m skeptical it will happen.

Brazil cut interest rates last night, from 12% to 11.5%. The country had been hiking rates to fight inflation, but the need for growth has returned to the forefront. This should be a positive, as demand from emerging markets has been a concern. But the country everybody wants to see shift from tightening to easing is China.

Earlier this week, China reported quarterly GDP growth of 9.1%. Yeah, that’s still amazing growth, but it’s lower than the +10% we’ve grown accustomed to. China’s been trying to slow inflation that’s most pronounced in its real estate sector. Growth is slowing, but it’s not clear yet if China is ready to take its foot off the brake.

And for China, the U.S. serves as a pretty good example of what happens if you don’t manage a property bubble effectively. It blows up in our face. And nobody wants to see that, especially with global growth so fragile. Personally, I’m content with letting China keep its interest rates and lending standards right where they are for a while.

Write me anytime: [email protected]

Until tomorrow,  

Ian Wyatt
Editor
Daily Profit