Eurozone Bonds and New Euro Lows
As MR forecasted in Sunday night’s newsletter, the markets did bounce from very oversold levels. However, it hasn’t been a smooth ride and sellers are still in control for now. The Euro is hitting 2 year lows which is a major concern.
Monday started the week with a strong 21 point rally in the S&P 500 (1.6% gain) to finish at 1316. Tuesday continued the rally most of the day and reached a high of 1328 but sold off with only 30 minutes left in the session and finished unchanged. Today saw weakness that accelerated mid-day to a low of 1296 but rallied very strong late in the day to finish at 1318.
The main reason for the late rally was that Italian Prime Minister Mario Monti and French President Francois Hollande released news that they agreed to consider all measures to boost European economic growth, including Eurozone bonds. In addition, others are betting that European Central Banks are making plans to backstop the euro zone should the crisis worsen. The large up and down swings and large volatility are a direct result of mixed rumors and statements coming out of Europe.
As MR has stated for over a year, Europe is only putting on temporary bandaids and investors want a credible solution for the future. In addition, we have put forth the “reasonable solutions” of Eurozone bonds and of a stronger ECB role in bank deposit guarantees in Euros. The Eurobonds would provide an investment that spreads the risk of the troubled countries across the group. The ECB bank deposit guarantees in Euros would help slow down the run on the banks in Greece, Spain, and Italy. The ECB could also lower the interest rate and start a QE program of their own.
Unfortunately, these solutions will take time and Germany is opposed to these ideas as the strongest country in the Eurozone. The strongest country is rightfully reluctant to save everybody else that is drowning. But a realization that they might also drown without these ideas implemented might start to gain some traction. The biggest immediate fear is still that Greece will be dropped out of the Euro and it will cause a “Lehman-like” chain reaction that threatens the whole financial system again.
It is clear from the strong buying late today that investors are still holding out hope for some kind of Eurozone proposal to stop the Euro slide. The Euro currency has been slammed and the fall is picking up speed. It just hit a new 2 year low below 126 today.
The recent market bounce is more of a technical relief rally (“dead cat bounce”) until proven otherwise. It could still move higher towards 1,340 but our lower target for more weakness in the next few weeks is the 200 SMA near 1,280.
Power Stock Picks
As detailed Sunday, the markets are very oversold and a strong overdue bounce is still in progress. Some momentum from a short squeeze could also push the markets up farther than many think. Therefore, we are still sticking with our ETFs from Sunday night for the next few days. Keep tight stops.
Silver and gold continue to struggle and oil and unleaded gas are still falling.
MR believes gold prices below $1550/oz, silver prices below $28/oz, and WTI Crude Oil at less than $90/barrel offer long term investors a good buying opportunity. Scaling in slowly on more weakness is reasonable with hold periods of 12 months or longer.
The caution alert for retirement accounts and investors is still present. Selling some equities to protect gains in case of more heavy selling is prudent at this time, especially if you can take advantage of selling at higher prices during a market bounce. Make sure to be ready to sell even more in case the Euro completely unravels and takes the markets down hard.
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