Saturday, December 10, 2011

MTU Weekend Ed. - ... so goes the world (12/9/11)

To say “as Europe goes, so goes the world” may be a stretch. However, the European sovereign debt situation has certainly been driving financial markets on both sides of the pond. Correlation among markets has been high. Look for clues from Europe.

Macro Picture
Markets have traded with much focus on the ECB policy meeting and the “make-or-break” European summit over the past week.

ECB actions turned out to be a non-event. A nominal rate cut was offset by Draghi’s less accommodating comments. Those who have been hoping for aggressive bond-buying support from the ECB were duly disappointed.

The European summit turned out to be neither making nor breaking. There’s agreement on future fiscal discipline by EMU members but no EU-wide treaty to enforce the new fiscal rules. There’s also agreement to funnel €200 billion to the IMF. Recall the unconfirmed whisper of an IMF "Global TARP" - Nikkei reported this past Wednesday that G20 planned to funnel $600bn into IMF to backstop the European sovereign debt crisis.

In Talk and Action (12/2/11), we observed that
“Theoretically speaking, the U.S. Fed is likely the only central bank that can carry out effective quantitative easing at the moment. (To a lesser extent, IMF could act as a conduit of funneled money.) Japan comes as a distant second and investors should forget about direct and effective ECB quantitative easing at the moment.”

So far, so good. Despite promises of future fiscal discipline, European government funding issues and creditor mark-to-market pain are still here. Ironically, the bond market - at the moment - is doing a fine job in pricing in and differentiating risks through adjusting spreads - monetary union or not. Look for additional printing by the U.S. and fund-flow through IMF as a conduit.  A global TARP may indeed be a short term fix.

Frankfurt DAX
DAX appears to have substantial upside potential if it can overcome a couple of serious trend-line resistance (Chart 1 blue or red [i]). Expect the 0.618 fib retrace level to be hit. Otherwise, the risk of a truncated rebound means that the Sep/Oct lows are at risk (Chart 1, red C and Chart 2 red).

Chart 2 reveals a five wave decline from its nominal high on Dec 5th, with the recent rebound as wave 6. Odds appear to favor an additional wave down as a corrective sequence requires 7 waves (Chart 2, blue) - rising above 6077.17 before a lower low invalidates the blue count. For example, the green count shows a completed 7-wave decline from the orthodox high on Dec 2nd.

U.S. SP500
U.S. stocks are in a similar spot - approaching trend-line and key moving average resistance. Chart 3 sums up the working bullish (blue) and bearish (red) tracking counts on SPX.

With U.S. stocks at a much deeper rebound level, SPX needs to successfully rise above its MA200 (and ideally take out the October high) to eliminate the potential of a truncated rebound (Chart 3, red-alt, i.e. October high holds).

Chart 4 counts the rise from the Nov low as a completed zigzag (red) or a incomplete larger zigzag (blue). Both counts allow for  a push lower. Chart 5 shows the squiggle count from its recent nominal high.

Last but not least, keep in mind the following chart of maximum confusion (Chart 6).