We may have a sell the rumor, buy the news with the events in France. Mr. Hollande won the first round in a 10 candidate preliminary where the extreme right Le Pen and communist candidate got about 33% of the vote. What does this prove? Austerity does not work, it never has and it never will. You can’t put people in a box and expect them to take it. If you are going to have national shared sacrifice it has to be for a much greater cause. Only one comes to mind for the entire 20th century. Yes, World War II was the ultimate sacrifice by every victorious nation because they had to defeat evil. In defeating evil, they knew that in the words of the great Nuremberg judge Robert H. Jackson who said, “The wrongs which we seek to condemn and punish have been so calculated, so malignant, and so devastating, that civilization cannot tolerate their being ignored, because it cannot survive their being repeated."
That’s sacrifice. But to ask people to continue to make sacrifices because of what happened in the subprime mess, how they turned the other way for Bernie Madoff (and a 1000 mini Madoffs) and how it continued last year with the MF Global debacle may be a fine idea on paper just as the Versailles Treaty had the mission to punish Germany, in reality it doesn’t work. The French people will rebel against it, just as the Greeks eventually will and anywhere else people can’t become unified for a greater cause. We can only hope the next 5 years are better because if they aren’t either extreme right or extreme left will end up winning in France. Those who don’t learn from history are condemned to repeat it. All you have to do is look at the 1920’s when Italy pinned its hopes on Mussolini. The Japanese came next, then Hitler and finally General Franco. It starts in one place and spreads like a virus. Enough of that. The French market looks like it may have bottomed when the handwriting hit the wall that Hollande is actually going to win.
Why is this the lead story here? Simply put, I thought we could have a sell the rumor buy the news event with a Hollande election next week when he meets Mr. Sarkozy in The Finals but it is starting to look like we already have the handwriting on the wall. As you can see, as the tide turned against Mr. Sarkozy the pattern kept dropping. As rumor turned to news, the price action turned back up.
Click chart to enlarge
The next big story of the week is Apple. What a tremendous spike! It looks like most of the bears ran for the hills on that. Of course, it’s a good news event as sales for iPad and iPhone skyrocketed last quarter with a good portion of those sales coming in China. They expect strong sales to continue but now we have to wonder if the tremendous spike means the stock price has the good news built into it for the most part. Are they celebrating the past 3 months or is this surge to be sustained. Remember, the stock price has little to do with the actual fundamental event. It’s the perception that counts. But the Apple event has caused serious bear violation to the technical in the NQ. This violation is important enough to either turn this correction into the complex grinding affair we thought it would be or end it altogether. Lots of charts had technical improvement with the Apple turn. But none more than the BTK, which is already making a new high.
This is problematic in one sense because after a month of correction, the VIX has not elevated to a point where we could anticipate a fresh leg up in the stock market. I think the VIX is much too low for that. My concern is a repeat performance of last year where we had various highs closely related to each other. Speaking of last year, we are right at the first anniversary of the Osama Bin Laden market/oil high and Greenback bottom. You remember it, the end of Bin Laden was widely celebrated as it should have been but the media also thought the market would celebrate but really didn’t understand when the selling started. The truth of the matter was an oil chart which hit the perfect storm of 610 days up while also hitting a Gann square of 9 calculation of 903dg. Clive Capital, the energy hedge fund out of London lost $400 million in the first 4 days and they were quoted as saying they never saw it coming and had no clue as to what happened. The bottom line was the Greenback bottomed at the same time and has enjoyed one of the better years in the past decade.
But now the US Dollar is in trouble again simply because it put in a double secondary high (similar to the NASDAQ peak in 2000) and sold off the whole week. It should make a bounce attempt this week. I’m not insinuating the Dollar is about to crash the way the NASDAQ did simply because the NASDAQ topping pattern followed a bubble. Nevertheless, you can’t like the double peak failure after the high. This may bode well for the stock market in the near term because a weaker Dollar probably means a better Euro with equities benefitting as well. But then we get back to the same conundrum . How far can we really expect equities to go unless they start climbing a wall of worry?
Remember in the period leading to Christmas the stock market dropped while the VIX dropped as well? At that time I told you the market would likely rally but there would be a ceiling on how far it could go. To be sure it went a little further than I would have thought. Now we have the exact opposite condition. By the end of last week we had a condition where the S&P dropped Spain 2 notches yet the markets rallied. In case you are not sure, that’s a new wall of worry. For this rally to be sustainable we are going to have to see more of that.