Wednesday, May 26, 2010

Confusion Abounds

Interesting day in the markets. Very bearish close. Going into the close I was thinking this looked awful but unsure at the current point. There are several things that should guide investors on whether there is more selling to come or we still have some rebounding to do.

There are three things I am watching very closely. The S&P 500 level of 1055 ish, the Euro level of 1.2150, and Spain. The tail I think is Spain. The dog is the other two. The tail will wag the dog.

If your in the stock market you need EWP, STD, and BBVA on your trading screens. The markets followed them tick for tick today. Spain seems to me to be about to unravel. Whether that is days or weeks I am not sure but Spanish banks appear to be having severe funding problems. The United States had this also of course and the United States backed the financial system. Whether you agree with this or not (entirely different discussion) it was an option the United States had because it had balance sheet flexibility. Spain does not have that same flexibility. Spain has sovereign debt issues but that is a much smaller problem compared to the other Euro nations. Its bigger problem is the private debt, similar to the U.S. in 2008. So Spain's problem is it has a sliver of Greece with sovereign balance sheet inflexibility and U.S. like overindulgent consumers. BBVA has been having trouble raising $1 billion in commercial paper. This has been heavily weighing on the Spanish markets and could spread.

Anyway, if that doesn't develop overnight, than i think we bounce tomorrow and have more rally to go. The current information seems priced in. The problem is future information will probably deteriorate. If it gets worse than I think you will see the U.S. markets fall apart.

In general we had a massive rally though it doesn't feel like it. We went from 1040 to 1090 or a 4.8% move from top to bottom. The duration seems quick for it to be all over and done with.

Anyway I am watching 1055. That was the low last Friday and acted as resistance several times yesterday before finally getting through it. If we have a legitimate break of 1055 I think we go to 1040 for the second time and don't think it will hold.

Resumption of heavy selling tomorrow I put at 50%. In otherwords I really have no idea. I still think there is a decent chance we get up to 1100 to 1120 but I think Spain controls that destiny.

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