Mar 25

The Market Today 3/25/13: Bailout


The news feeds were blazing over the weekend over the situation in Cyprus. As if anyone did not know, The banks in Cyprus were in desperate need for a bailout. From the weekend before, there was a proposal for a bailout, that included haircuts for all Cypriot depositors!! Obviously, this created an uproar all last week. During the week, Cyprus caved in under the uproar, and voted down the proposal. Following this, they leaned towards Russia for a solution. This is because, Russia accounts for roughly 18% of all deposits in Cypriot banks, and they would stand to lose millions. Russia balked. All weekend, everyone was on pins and needles to see if a solution could be found. Early yesterday evening, a solution was found. As can be expected, the futures opened up strongly. The cash market opened with most of the strength shown in the futures market last night. However, the strength did not last long. The Dutch Finance Minister said that this bailout would be used as a template for further bailouts in the future. This remark started a sell off globally. The thought being that if the banks in Spain and Italy would need a bailout, the same template would be implemented here. With this thought in mind, the Spanish ;and Italian markets both lost 4%!! Their debt markets also sold off.

Bailout: Direction

With all this being said, this beg’s the question, where do we go from here? This is a tough question. Looking at today’s trade, the chart shows two trendlines. The market has been trading within these ascending trendlines since last November. Roughly two weeks ago, on March 8th, the trading broke through the upper end of the trendline. This indicated a stronger upmove should ensue going forward. While the market did continue to move higher, the lack of strength could not move the S&P to new all time highs. We did come close this morning, before the reversal. The good news, we closed above that upper trendline. We did however break below it intraday, but closed above it. Looking at the momentum of the market, as shown by the MACD, and the RSI, momentum seems to be decelerating. Therefore, tomorrow is key! From the indications I see, a small pull back is in the cards looking out the next few weeks. For now, we should not view this as a negative. The market has been moving upwards pretty much unabated since the November low. Any pull back should be considered healthy. The levels to watch are 1,540, and 1,500 for now. The situation in Europe would have to deteriorate significantly for the market to move much below the 1,500 level. Remember, the market has the ultimate protective put set in place. This being the Fed buying bonds under the QE program. This will help limit the downside.

Bailout: Sentiment

The real key now is the sentiment. Will the situation in Europe derail the current bullish sentiment? For now, I would have to answer no. This however may change quickly. Should the Cypriot situation start a contagion in the European periphery, the sentiment will quickly change to negative. Should this happen, the sell off could strengthen, and the 1,500 level could be tested. Beyond the 1,500 level, the 1,430 level, should this be tested, could signal a significant trend change to down. Remember from my earlier post a few weeks back, the similarities between the chart patterns of the current market, and that of 1987, were eerily similar. This being said,  the numbers to watch are 1,500, and 1,430. Should the latter number be broken, we could be looking at another 1987 later this year. Also keep in mind, the pattern strongly exhibited the last three years…sell in May, and go away. I feel that this will be the same this year. For now, stay long, but be quick to pull the trigger, and be protective if necessary.

Author Sean Rhodes is an expert in financial markets and helping you manage your money. For a no-risk consultation, check out Sean at the following link for more information and expert advice on investing in equities and keeping  any bailout from ruining your portfolio.

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