With Little News, Focus Returns To Europe

After a big rally on Friday, the markets are in selling mode this morning. There is actually little in the way of market moving news here, but chatter about the weakness among European banks is making the rounds again and causing some selling.

It is also weighing on the euro, and boosting the dollar. The weak dollar is also hurting commodities today, except for gold, which has traded north of $1250. It looks like the old flight-to-safety trade is on today, with the only real assets moving higher being gold, Treasuries, and the dollar.

Asian markets bounced back strong on Monday, but were mixed overnight. The 10-year yield is pulling back from its big spike higher Friday as well, back down to 2.65% today. And the volatility index (VIX) is spiking +11% to 23.70 after hitting new 52-week lows on Friday.

Among the sector ETFs, all are lower so far, led by financials (-1.6%) then energy (-1.4%); consumer staples (-0.06%) and utilities (-0.05%) are down the least.

There has been some chatter about a new round of tax cuts or proposals from President Obama, but details are not clear yet. The talk is about new capital expenditure tax incentives. Those would help, but I would prefer to see the tax cuts focused on small business.

Trading comment: After last week's big rally, the market is no longer oversold. The S&P 500 is also right in the middle of an area above its 50-day moving average, but below its overhead 200-day (still at 1115). I would call this area a no-man's land of sort. Additionally, if you draw a trendline from the April highs through the August peaks, the SPX is currently right at that downtrend line, so some technical selling is normal.

But sentiment is still overly bearish, imo, and as such I think that after a pullback the market will likely rally again. The SPX 1115 area marks the flatline on the year, and if the index gets back above that level, we could begin to see some stock chasing by portfolio managers as performance anxiety sets in the closer we get to the end of the year. Sept. 30th is qtr end, and no managers want to be trailing their benchmarks going into Q4.