Wednesday, December 28, 2011

Euro Breaks Recent Support

In recent months, I have said repeatedly that all you need to do is look at what the euro is doing to know how stocks are faring. This morning the euro is breaking recent support levels and falling to fresh lows.

The drop in sentiment comes on news that the ECB's balance sheet has grown to a record 2.73 trillion euros. And despite positive Italian bond auctions this morning, bank deposits at the ECB are now at a record 452 billion euros. So although the stress in the U.S. stock market has eased in recent months, the stress on the interbank lending markets in Europe remains high.

Asian markets were slightly lower overnight, while Europe is mixed this morning. The drop in the euro and rise in the dollar is also weighing on commodities. Oil prices have eased back to $100.33, but are still high amid tensions with Iran threatening to close the Straight of Hormuz (a key shipping route for crude oil). Gold prices are also lower, down to $1575.

The 10-year yield was able to get above 2.0% for a couple days, but is back below those levels today. It is currently down near 1.94% after running into overhead resistance at its 50-day average.

As for the VIX, it is up another 5.25% right now above the 23 level. A lot of traders were looking for volatility to continue lower as we neared the end of the year and another 3-day weekend, but the last 2 days have seen a fair bounce in the VIX. That said, the VIX is still well off of its highs from recent months and much closer to getting back below the 20 level where it was before the market fell out of bed in August.

Trading comment: We have been pretty quiet here in year-end trading. The SPX is at key technical levels. Yesterday it close above its overhead 200-day average near 1259. A couple of consecutive closes above this level would have put the bulls back in front. But today we are trading back down below those key levels. We will have to see how the market fares into the close, but a quick turnaround back below the 200-day in one day's time isn't what the bulls were hoping for. The SPX has been up for 5 straight days, so I would expect some normal consolidation. But I would like to see a mild price drop.


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