Just as expected, it didn’t take much for the S&P500 to bounce after being fairly oversold on a daily basis. The S&P managed to jump 3.7% on nothing very meaningful however. In fact, Ben Bernanke from the Federal Reserve disappointed markets, which were looking for strong hints of more QE, when he did NOT hint that any new monetary program was around the corner. Volume was solid and the VIX slumped over 20%.
That said, the S&P500 is still in a downtrend when looking at the weekly charts. It will take a much larger rally to negate this downtrend. On the daily charts, the oversold condition is no longer in effect. Technically, the market is still looking up and could easily rise another 25 to 35 points before becoming overbought.
Other breadth indicators are mixed. The daily new highs minus new lows index has been weakening for three straight months. This has not reversed. The McClellan Oscillator is actually slightly overbought; based on this, a short-term pull back would not be surprising. The Summation Index, however, has just started to turn up; it’s possible we could rally another week or two, before becoming overbought on this index.
US macro news certainly did not spark the rally. Factory orders disappointed, badly. ISM services essentially met expectations. The same thing happened with initial jobless claims. Consumer credit plunged, far more than predicted. And international trade was worse than expected; this will lower Q2 GDP results.
After the week’s trading ended, Spain announced that it would most likely seek bailout funds over the upcoming weekend.
Why is this important?
Well, to start, Spain denied that it would need a bailout only two weeks ago. This was denial was delivered by the prime minister of Spain. The point is that why should any leader in euroland be believed if their words are, well, worthless. Trust and credibility will be decline, even further, in euroland.
Also, there’s the problem of Spain’s size and where the money will come from. Keeping in mind that until now Spain was one a rescuer, not a victim in need of a rescue, Spain will now change sides…..shifting a huge burden on the remaining rescuers in Europe.
Spain could potentially require hundreds of billions of euros in bailout funds. Given that several hundred billion euros have already been committed to bailouts for Greece, Ireland and Portugal, just where exactly is this massive pile of new money supposed to come from? Nobody knows for sure, at this time.
Finally, Spain’s deal could spill over to other troubled PIIGS. First, if Spain gets a bailout without draconian conditions (think austerity), then why will Ireland, Greece and Portugal just sit there and not ask for their harsh packages to be renegotiated to match the one given to Spain? Also, there’s a good chance that if Spain needs a bailout, then markets will turn to the next “domino” that could fall, namely Italy. And that’s where this game would end. Because even if euroland elites are able (and that’s by no means certain) to con the public into believing that they will come up with hundreds of billions of euros, euros that don’t exits, to bail out Spain, there’s no way they could do the same with Italy.
Well, the first reason would be the size of the bailout. Italy could require over half a TRILLION in euros, to prevent a financial and sovereign collapse.
Now just WHERE would such money come from?
Exactly, nobody knows.