My favourite indicator of market breath, the McClennan Summation Index, is finally beginning to get to a level where it is becoming interesting. A move into negative territory, though some ways to go, will herald the probability that stocks will soon begin providing price action that brings solid technical support. This is good news particularly for those who have been out of the market since the early September bull move. In my books patience is a major key to achieving above average investment returns. Those investors who relaxed and held off while the herd chased the trend should now begin to sharpen their attention. At the moment the Dow Transports (DJ-20) are showing more strength than the Dow Industrials (DJ-30). However, Technology, Mid-Caps and Small Caps all remain strong despite pull-backs. This indicates that the March 2009 bull trend is still solidly in place for the moment.
American and European stock exchanges have plenty of information to digest. The Republican victory in the lower house in Washington more than likely means there will be no Quantitative Easing mark 3, not without a fight anyway. This has implications for FED interest rates going forward. Without easy money to soak up new loan paper the FED will have to compete for funds. This action will force rates up. Bond holders beware.
Europe has the potential to turn into a basket case. Brussels still has not brought in the permanent structural systems necessary to provide bond auction stability. The inexperienced comments by Angela Merkel regarding bondholders sharing future pain rocked the Euro to its foundations. Until the matter is resolved the experience of Greece and Ireland is more than likely going to be forced upon Portugal, Spain Belgium and Italy. Strange days indeed for the Euro project. I have been saying for years that the Euro is not in totality a true currency but is in effect a sophisticated exchange rate mechanism of which the main beneficiaries are German exporters. Currently Berlin has the best of both worlds. It has access to European markets for its produce without having to worry about high exchange rates spoiling the party yet is does not really want to pay the full cost of creating a comprehensively sophisticated financial system. Much work remains to be done but how things play out will have major repercussions for the market. Currently in Germany Deutsche Bank is showing signs of major weakness and this is not good for the Euro area generally. Banco Santander, which until now was very strong, is beginning to break to the downside.
For those of us living in Ireland the events of the last two weeks have been humiliating. A team from the IMF (International Monetary Fund) and the ECB (European Central Bank) agreed to grant the Irish Financial System a 3 year bailout of 85 billion Euro. However, Ireland must first draw down its last independent lifeline of 19 billion Euro that remains in its Sovereign Wealth Fund. Once these funds go the country will be left utterly broke, totally reliant on the grace of foreign credit. The rate on interest charged is an eye watering 5.8%. This rate is onerous and is an indication that potential default is being priced in. Thus the crisis in the Emerald Isle is far from over. The Parliament votes on its austerity budget December 7th. The eyes of the World will again be upon Dublin. If the vote fails, the IMF/ECB package will be put in some doubt, and all hell will break loose across European markets.
Chart: McClennan Summation Index
Chart: Deutsche Bank
Chart: Banco Santander
