Thursday, July 26, 2012

Draghi Gooses The Market

Asian markets were higher overnight, but trading was lackluster in Europe this morning before ECB President Draghi made heroic comments that really boosted the market.  Draghi was quoted as saying the ECB "is ready to do whatever it takes to preserve the euro" and that sharing national sovereignty is still to come. 

Those comments caused a sharp rally across global markets.  The euro also got a big boost, as did commodities.  Gold prices rallied to $1615, oil prices are higher near $89.85, and silver and copper prices are higher as well.

It is unclear what measures Draghi can come up with at this point, and the big issue is going to be how to get Germany to go along with many of the solutions that they have been opposed to.  So it will be interesting to see how long his comments soothe the markets for.  Some are also speculating that maybe the ECB will do some quantitative easing of its own, but in the long-run its hard to solve debt problems with more debt.

In economic news, durable goods orders rose 1.6%, boosted by aircraft demand.  Ex-transportation durable goods fell -1.1%.

Earnings reports continue to come in fast and furious.  This morning I am seeing more stocks rising on earnings than falling, but a few in-line earnings reports have been met with some outsized selling.

Stocks rising on earnings: ACOM, CAKE, TSCO, MMM, NOV, NEE, SHOO, UTX, S, WFM, XOM, V

Stocks falling on earnings: SRCL, GNC, POT, ZMH

The 10-year yield is also getting a small boost, up to 1.43%.  The 1.40% level has held so far this week and I would like to see the 10-yr yield bounce higher.  Call me old school, but these low levels don't incite much confidence in the outlook for the economy.

As for the VIX, it is down more than 5% this morning to around 18.25.

Trading comment: This feels like an oversold rally to me.  The SPX would have to get above last week's 1380 highs for us to talk about the market rallying back to its old highs.  I have said that I think markets will be choppy in the near-term, and today's rally fits that bill.  The markets had been down pretty sharply over the last 3-4 days so they were ripe for a snapback.  Let's see if the market can build on these gains over the next few days.  The SPX held its test of its 50-day support this week.  If that key support gives way in the near-term folks will be talking about retesting the June lows.  Tough environment = stay defensive.

KAM Advisors has long positions in NEE, SRCL, V


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