The bottom line here is however you slice it, everyone is in agreement there is no more selling interest going back to the low which raises the probability the fear based lows were a combination of mild panic and perhaps some forced liquidation as well. By default, if it isn’t going down, there’s only one other way for it to go. But given the Spanish news this is more than likely a short squeeze. What that means for the time being is they took the weaker bears out of the market and the only likely bears still in the game are the longer term ones who are better positioned in the middle to the upper end of the range. That opens the door for higher prices. But if they can’t push it beyond the middle to top 3rd of the range, stronger hands will attempt to take it down again. The bottom line for Europe is we still can’t rule out a move to the 1.2000 handle but more than likely the time deadline has changed. We may not see such a move until later in the year.
Overall, I don’t think that currency or equity European bears have given up, probably just a case of hibernation. IF the VIX falls below 20 the first part of the week odds greatly increase for a peak in this rally in about a week or somewhere in the top 3rd of the range or a combination of both. The only thing that could change my mind with this bit of information is if the wrong parties win these elections next week and the market starts to rally. I’d much rather see the market rally on a wall of worry then ride the slope of hope which it’s doing right now. When down trends end stall and then rise on good news, that’s not a good sign no matter how good the action is.
If you get nothing else out of this post, I want you to think of one thing. When markets started rising for real in 2009, the media spent an inordinate amount of energy asking many guests if they thought a double dip recession was in the cards. Markets rose on worry. Right now they are rising on the emotion of relief. We feel relief that Spain is getting bailed out and rightfully so. However we have to look at the price action and figure out what is driving the bus. Right now its short covering and I doubt fund managers are committing new capital to this market. The only time they likely get the courage to come in is if we consolidation or some test of the low that isn’t taken out. Fund managers are not traders and they need to see that the water is warm. They chased performance last year and there is no reason to believe this time is any different.