Simple trading strategies always point to the need for a little perspective. And although stocks, ETF funds and other investments have lost some of the momentum that have pushed them higher since the June 8 low, the evidence continues to suggest the path of resistance continue to point to the heavens.
Both the S&P 500 and the Dow Jones Industrial Average moved down to test important technical levels at the 200-day moving average for the second day on Thursday. Buyers, it seems were scared off by a batch of ho-hum economic data. But the upward momentum that’s been in place since June 8 appears intact. Breadth remains healthy, the euro continues to strengthen against the dollar, troubled European nations are raising capital at lower interest rates, and the CBOE Volatility Index remains subdued.
The news out of Europe is especially heartening. Spain was able to get off $4.3 billion worth of 10-year and 30-year bonds at below market yields. The auction follows an issue of short-term debt earlier this week. Long-term debt is seen as riskier, so the fact that Spain was able to get attractive rates is a very positive sign.
Word that European leaders will publish the results of bank stress tests — similar to the ones the U.S. Treasury conducted last year to gauge capital exposure — is helping the situation. Spanish prime minister Jose Zapatero noted: “There is nothing better than transparency to demonstrate solvency, to promote confidence and to leave behind all these unfounded rumors.”
I couldn’t agree more. Transparency is always a good thing. Plus, leaders have set out plans to more closely monitor fiscal budgets within the euro zone. All are signs that the folks across the Atlantic are taking the situation seriously. The euro is flying higher in response, which is great news for risky assets like stocks and commodities since they tend to move in lockstep with the currency. The euro is up 7.5% against the dollar over the last eight trading days for its best performance since March 2009.
I can’t help but draw parallels to the way our own government got its act together after stocks plummeted when the U.S. House of Representatives voted down President Bush’s TARP bank bailout legislation. Politicians seem to think that they can ignore what the market tells them to do. A good dose of financial panic seems to be the cure all for that particular type of hubris.
In a way, today’s retest of the breakout of the 200-day moving average on the Dow Jones Industrial Average and the S&P 500 was the best of all outcomes since it demonstrated the selling pressure has truly been dissipated. Otherwise, the early morning dip to the important technical level would have unleashed a torrent of selling pressure. Instead, the pattern of higher lows continued to hold.
Overall, Breadth was excellent, volume improved slightly, and the broad market is far from overbought. An increasing swath of the market is participating in the advance. And risk aversion is melting away. The VIX has lost a total of since May 21. That’s by far the largest and fastest drop in the VIX since 2006.
Overall, with risk appetites increasing and breadth increasing, the bulls are in change. This is great news for small cap stocks in particular, which tend to do better than the overall market during upswings. The Direxion 3x Small Cap Bull ETF (TNA) looks attractive. Some of the more nimble European stocks are also catching my eye, including National Bank of Greece (
NBG) and STMicroelectronics (STM). STM has a reasonable PE ratio of under 14 right now.
