C’mon folks, enough already. Aren’t you emotionally drained from this Greek tragedy? Let me just put out one disclaimer. Whatever emotional distress we are experiencing as traders and market followers is nothing compared to what the Greek people have to endure on a continuing basis and my heart goes out to them.
That being said, the market is a perverse mechanism and our work has to go on. I think we have all had it to the bone when it comes to the constant fear and rumor mongering at every twist and turn of this saga. The only thing different this time compared to last year is the Euro chart looked so much worse that you had to take it seriously. I think we are all incredibly tired of having to listen to pundits, finance ministers and international bankers talk about the next Lehman moment.
Eventually some radical political party is going to win. You can’t push people into perpetual poverty without having to pay the piper. You would think Europe would have learned this lesson after WWI and one would hope the German nation would learn from its own history. I do understand the German mind and it’s precisely because of their past do they truly embrace austerity for Southern Europe but even for them the pendulum can swing too far.
But in our work, nothing has changed. I came here probably for the first time in September or October and told you that when it comes to Lehman moments, the sequel will never live up to the original. The fact is a panic materializes when people aren’t ready for it. Authorities all around the world for ready and waiting with printing presses for this accident waiting to happen so while it has always been our opinion the market is vulnerable to a hit, it was not likely to be a 2008 style disaster. Not when it comes to Greece.
Now that it’s happened, I took time out from Father’s Day and the NBA Finals to tune into the psychology involved with the opening of trade on Sunday night. What I’ve found is very encouraging. Not because Greece is not leaving the EU but because of the sober and cautious way everyone is dealing with the outcome. If they came out on Sunday night with party hats this column would be about a market getting ready to top out on Monday morning. I think it can last longer than that. But the key theme on Sunday night was ‘skepticism.’ Market players are very skeptical that a government can be formed and even if it can, will they be able to keep it together? Even if they can keep it together you can rule out real prosperity and growth due to the sheer level of the debt involved. Given the level of the debt, people wonder how long Greece can sustain at this pace before they finally give up and have to leave the Euro.
This is very constructive sentiment at this stage of the game. At least for Sunday night, it had the feel and look of a market climbing a wall of worry. But now we have to consider the quality of the pattern. Last week I told you in this space I thought this bounce leg from early June can continue at least in the time window at the seasonal change point. Shortly after I hit the send button on last week’s update the market got hit real hard last Monday, creating the kind of bearish candle not easily overcome. There were even pundits who came out on Monday night and said the rally was over. It didn’t make this writer look very good. But when it comes to markets, sometimes extreme patience is required and here we are a week later on Phi Day, and the market bounce is still intact.
But there are issues that still concern me. First of all, this is the week of the Summer Solstice which can be an important seasonal change point. Monday is June 18, in other words 6/18 or the time of year where we are at 618. It’s an integral part of the seasonal window and I’ve seen major turns on different charts over the years commence right on Phi Day. The fact of the matter is regardless of the Greek situation I still don’t like the pattern.
Then there is the matter of the ‘relief’ aspect to this news event. Markets also rallied because they perceived Europe dodged a major bullet. But if you rile up the people to something that wasn’t even likely to happen how much of a bullet did you really dodge? SYRIZA was never really in the lead and the truth of the matter is people generally spend a lot of times worrying about things which never happen and the market is no different. Nevertheless, markets do also perceive an element of relief and that’s all that matters.
I don’t like the fact this still appears to be a market of un-committed bears that run for the hills and cover at the first sign of adversity. Case in point was Thursday. The NQ started skyrocketing around noon Pacific Time and jumped about 20 points in about 12 minutes right out of the blue. The chart was about halfway up the ladder when FOX Business announced some rumor that regardless of the election outcome, come Monday banks across Europe would feed liquidity into the system. I have to tell you the first time I was victim of a short squeeze was in January 2001 when I was short and Alan Greenspan announced the first rate cut in an unscheduled Fed move 3 weeks before the next Fed meeting. Tech stocks ran to the Moon that day. Bears were covering; no doubt about it but at least it was due to some actual activity. Here, in this market late bears seem to exit at the first sign of trouble. They don’t even need QE to exit; all they need is a whiff of any kind of QE.
Next page: What it all means
So what does that mean? In the last few columns we discussed the fact this market is sitting on some really shaky support. Markets didn’t stop going down last year so much because buyers couldn’t wait to get in at the great valuations; bears gave up when Europe didn’t have its Lehman moment. It was only later that fund managers who were forced to chase came into the market. The same thing is happening again. The charts look as crummy as they do because they build up the fear and take the market down and when it fails to materialize they run for the hills. It’s not a market of buyers, just a battle between the smart and non-committed bears. If you can understand that, you have most of the battle won. In the bigger picture it still resembles the kind of correction we’ve been talking about for the last 3 months. Namely a winding and grinding intermediate level correction that isn’t likely to end until such time we all give up on the notion that it can go higher.
If you want to be frustrated about anything, consider a VIX that dropped into the 21 handle last week after hitting near 25 for the week. These European rumor mongers are not doing anyone any favors. Every time they come out and say they favor a QE type approach, the VIX takes a hit and just pushes the end of this correction further down the road. We were hoping we could see this time window create a low but now that we are here and the market is higher we are still at risk for a high. What news event could accomplish that task I have no idea. But I will tell you I sincerely doubt a VIX in the 21 handle can create a sustainable bounce that will get the market to new highs for the year. It’s possible; it’s just not very likely. So while everyone is looking at the global economy and the fundamentals of the debt problems, I’m focused on market sentiment and psychology because it has been driving the bus and will continue to drive the bus. That’s why the chart of the week is the VIX which is way too low to sustain whatever it is we are developing. Okay, we’ve had several weeks of short covering every time we see a ray of sunshine when it comes to Europe. If there are real buyers out there they need to come out and start committing to this market. If they don’t we could see the high fairly soon.
Click chart to enlarge