In a December 2011 video, we explained how the ECB was using a "back-door bazooka" approach allowing banks to use borrowed ECB funds to purchase newly issued Italian and Spanish debt. While acknowledging the ECB's approach could be a "short-term fix", we questioned how the unlimited loan program would address the core problem of too much debt. Four months later, the markets are beginning to realize serious problems remain in Euroland. From Thursday's Wall Street Journal:
Europe’s bold program to defuse its financial crisis by injecting cash into the banking system is running out of steam. The European Central Bank’s roughly â?¬1 trillion ($1.31 trillion) of emergency loans caused interest rates of troubled euro-zone countries to plummet earlier this year, easing fears about Europe’s debt crisis. But lately rates have again been marching higher.
One big reason: After months of using that cash to buy their government’s debt, banks in Spain and Italy have little left, say analysts and other experts. The banks’ voracious buying had helped bring down the interest rates, providing relief for troubled countries that need to issue tens of billions of euros of bonds this year. But the banks, lately the primary buyers of Spanish and Italian government bonds, no longer have much spare cash to continue such purchases.
On Friday morning, the yield on an Italian 10-year bond was approaching similar levels to summer 2011 (see arrows). The stock market did not perform well in August 2011.
We believe it is only a matter of time before the ECB and/or Fed are forced to engage in another round of massive money printing to prop up the global financial system. The big question for investors is will they take somewhat of a preemptive strike or will they wait for the next "flash crash" type event.
As we have outlined for clients, we believe the cycle of central bank-induced melt-ups and debt-induced melt-downs is not behind us. The video below, posted in Thursday's Short Takes, describes a new and "faster" market model we have designed for a melt-up/down world. For those pressed for time, a slide showing the video’s contents and corresponding times appears at the 20 second mark, allowing you to skip to selected topics.
After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.
The model described in the video above, the CCM Market Risk Model, closed April 19 at 85, which means despite the market's recent weakness, 85% of the answers to the model’s questions continue to come back in the bulls’ favor. The model is designed to move quickly, but for now it remains far from "run for the exits" territory.
Near the close on April 19, the S&P 500 was trying to stabilize at a logical level when viewed on a sixty-minute chart (see below). As we noted earlier in the week, the 100 and 200-hour moving averages acted as resistance near the close on April 17 (see intersection of thin red and blue lines). The pink trend channel is still rising, which gives the nod to the bulls until it is violated on the downside.
The Relative Strength Index (RSI) violated similar trendlines in a bearish manner earlier this week, which can foreshadow a similar move by price. Until we see some conviction from buyers, it would not be surprising to see market weakness continue.
On weekly charts, we have numerous momentum indicators that look tired. They still have room to stabilize but not that much room. The bulls remain in control but the grip is not nearly as tight as it was two weeks ago.
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Copyright © 2010 Ciovacco Capital Management, LLC. All Rights Reserved. Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC (CCM). Terms of Use. This article contains the current opinions of the author but not necessarily those of CCM. The opinions are subject to change without notice. This article is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. The charts and comments are not recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations are not predictive of any future market action rather they only demonstrate the opinion of the author as to a range of possibilities going forward. All material presented herein is believed to be reliable but we cannot attest to its accuracy. The information contained herein (including historical prices or values) has been obtained from sources that Ciovacco Capital Management (CCM) considers to be reliable; however, CCM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change and readers are urged to check with tax and investment advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. CCM would like to thank StockCharts.com for helping Short Takes create great looking charts Short Takes is proudly powered by WordPress . Entries (RSS)
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Copyright © 2010 Ciovacco Capital Management, LLC. All Rights Reserved. Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC (CCM). Terms of Use. This article contains the current opinions of the author but not necessarily those of CCM. The opinions are subject to change without notice. This article is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. The charts and comments are not recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations are not predictive of any future market action rather they only demonstrate the opinion of the author as to a range of possibilities going forward. All material presented herein is believed to be reliable but we cannot attest to its accuracy. The information contained herein (including historical prices or values) has been obtained from sources that Ciovacco Capital Management (CCM) considers to be reliable; however, CCM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change and readers are urged to check with tax and investment advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. CCM would like to thank StockCharts.com for helping Short Takes create great looking charts Short Takes is proudly powered by WordPress . Entries (RSS)
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