Euro Crisis Solved? Hardly.

The S&P 500 climbed 2.0% last week, but on declining volume, which is hardly a ringing endorsement of the price jump. And volatility, while it did inch lower, did not drop nearly as much as one would expect from such a sizable price rise. On a daily basis, the S&P is now slightly overbought. Breadth indicators are also very stretched; the McClellan oscillator closed the week at a level so extreme, it’s been reached only three other times in the last three years. In every prior case, the stock market pulled back markedly, over the following two weeks, after reaching this level.

Macro news continues to be weak. About the only bright spot is housing, and not because it’s roaring back, but only because it’s not falling any more, at least for now. New home sales inched higher. The Case-Shiller home price index finally turned positive, but it usually does every spring. And pending home sales beat expectations. That said, most other areas in the US economy disappointed. Durable goods orders ex-transportation were far lower than predicted. Initial jobless claims climbed even higher, even as most of the millions of people who enjoyed 99 weeks of benefits over the last two years have fallen out of the program. Personal income missed expectations. Chicago PMI disappointed, and so did consumer sentiment.

But none of these grim facts mattered to stocks. Why? Because Europe held its umpteenth summit and announced another “solution” to the banking and sovereign crisis, which is currently centered over Spain.

Supposedly, Spain’s banks will be able to get billions of euros in support, but without the conditions that were attached to bailouts for Greece, Portugal and Ireland. And the bailout funds may not necessarily subordinate existing bondholders.

But many details were left out….as usual. But such details were exactly what caused every prior summit “solution” to fail over the last two years.

And this solution will be no different. Sure it will cause a spike in stock prices in the very short term, and this has already started.

But because the fundamental problems (excess debt and a trade imbalance between the core and the periphery) in Europe have NOT been solved, this summit announcement is no true solution.

Once the markets have a chance to digest the details, they’ll figure out that nothing has been solved. And the exact same thing—that happened after EVERY prior solution was digested—will happen: the risk markets will sell off.  This could take a few weeks to occur, but it will happen.

In the meantime, long investors should enjoy the ride, but be prepared to reverse themselves not if, but when, the euphoria wears off.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: