Euro Bonds, Market Technicals, and Social Mood

Andrew Nyquist

By Andrew Nyquist
A few high level thoughts for this week and the week ahead:

1)  Euro Bonds on the Horizon???:  Word out of Europe is Euro bonds may be on the horizon.  Finally the possibility of some action after a painfully slow response by European powerbrokers such as Germany.  It seems Europe is just now beginning to understand that the marketplace doesn’t allow for weeks or months to solve a crisis; the marketplace wants/demands certainty and solutions.  And although Euro bonds may be a step in the right direction, market participants won’t know until they see additional details.

The future of Europe is at risk.  Unemployment among young men and women (i.e future leaders) is nearing crisis levels.  I believe a Greek default should have happened some time ago. Maybe a lifeline from the European leaders will buy more time, but a restructuring of their debt, in conjuction with some austerity measures, is a better long term move for the country than a lifeline (i.e. more debt) and cutting anything and everything in sight.  Remember, they set the example for other PIIGS (Portugal, Italy, Ireland, Greece, Spain).

If the issuance of Euro bonds becomes reality, and if done correctly, the market should firm and eventually rally.  The idea works better with member states, as opposed to countries, but it does fit the one currency theme.  Hopefully European leaders will seek the input of independents with fiscal and marketplace experience; this is not the time for politicians to push egos.  Note also that additional debt is not a generational solution, so they will also need to create a long term plan.

 

2)  S&P 500 Technical Picture:  Below is an updated look at the technicals of the S&P 500.  Note the volatility!  There have been two 80-100 point moves each way in the past month, and several quick reversal moves each way as well.  As we await news and details out of Europe, the wedge continues to narrow, and we are reminded just how tense this tape has become.  Play small, and try to avoid conviction – it’s best to wait for confirmation.

technical chart, s&p 500, technical analysis, stock market

3)  America Getting Moody:  Social mood is down and the state of consumer confidence and government trust morbid.  This has investors wondering where they should park their money.  Although the answer short term may end up being “nowhere,” I suspect a steady flow into the Large Cap space throughout the coming year.

Small Cap outperformance throughout the entirety of the March ’09 to April ’11 bull run was surprising to many (myself included)… but trends tend to last longer than expected.  But here we are, staring into a sea of economic uncertainty.  Pair this with the aforementioned lack of trust in government, and we have an environment conducive to Large Cap outperformance.  Three particular reasons for attraction to, and trust in Large Caps are:  1) Plenty of cash  2) Globally diversified earnings power  3) Dividends.

 

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Your comments and emails are welcome.  Readers can contact me directly at andrew@seeitmarket.com or follow me on Twitter on @andrewnyquist. Thank you.

No positions in any of the securities mentioned at time of publication.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of his employer or any other person or entity.


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