You can’t blame investors. It hasn’t been an easy six months. The Dow rallied 1,062 points from Jan. 1 to May 1, then declined 1,178 points to June 4, and now has rallied back 974 points to yesterday’s close, with 456 points of that rally, almost half, in just the last 3 days.
The volatility itself would be creating enough difficulty for most investors. The abnormality of having the market repeatedly manipulated by unexpected statements from euro-zone officials certainly adds to the mix.
It’s been a steady diet of sudden warning statements from the EU, or the ECB, or the IMF, that the euro-zone debt crisis is at a new crisis cliff, or that Spain or Italy must take immediate actions or be engulfed, mixed in with repeated emergency meetings and announcements of new initiatives that will bring the crisis under control.
It wouldn’t be so bad if the statements could be trusted to result in the promised actions and results. But for more than two years that has certainly not been the case.
How many dozens of times over the last two and a half years have we seen the various euro-zone powers issue promises of increasingly aggressive actions, only to either see the promises collapse under subsequent disagreement, or for the action to take place but not come close to having the promised result?
How many times have we seen euro-zone countries deny that the crisis has spread to their doorway, and claim they have everything under control, only to see them begging in panic for a bailout a few weeks later?
And here they go again.
With markets around the world plunging sharply for four straight days as economic and debt crisis reports worsened, European Central Bank President Draghi rushed in with the statement, seemingly out of the blue, that “The ECB is ready to do whatever it takes to preserve the euro. And believe me it will be enough.”
Never mind his potential actions being enough. Just the words were enough.
Markets around the world spiked up in hope that maybe this time something will come of it. The major hope is that it meant the ECB is willing and able to launch a round of massive QE2-type purchases of government bonds, similar to the previous tactics of the U.S. Federal Reserve.
It looked like the same old same old yesterday, that Draghi had gone out on a limb by himself without consulting other central bank members, when Germany’s central bank came out with a statement of its own reiterating its staunch opposition to further ECB bond purchases.
But hopes were kept alive and the market spiked up another 100 points instantly when Draghi announced he would be meeting with German and French officials next week to arrive at an agreement on the aggressive measures the ECB can take.
Add in the hopes (after yesterday’s GDP report confirmed that the U.S. economic recovery stalled further in the 2nd quarter), that the U.S. Fed will also come to the rescue, or at least also make stronger promises to do so, at its FOMC meeting next week.
Add in the heavy schedule of potential market-moving economic reports due out next week, including the Labor Department’s employment report for July, (to say nothing of more 2nd quarter earnings reports).
And you have the makings for another volatile week next week.
The extent of the spike-up yesterday was also probably enhanced by a significant short-squeeze. Many short-sellers made confident by the previous three straight days of triple-digit losses probably rushed to the buy side to close out those positions yesterday, as indicated by the increased trading volume. Adding to pressure on short-sellers is awareness of the tendency for the market to be up in the days surrounding the end of each month anyway.
I doubt it was investors who were pulling out of stocks through the first six months suddenly deciding to come back at this point.
Even those triangle formations quickly reversed direction.
I’ve been showing you the interesting short-term symmetrical triangle formations that had formed on the major indexes, noting how the direction they take in exiting the formation usually determines the next direction for awhile.
They dropped out of the formation to the downside in the previous four straight down days, which also probably encouraged increased short-selling.
But in the last two days, the ‘Draghi effect’ has them reversed sharply to the upside.
The Financial Times, Berlin: ‘Draghi Stance Attracts Political Support’. “The euro-zone’s most senior politicians appeared to give their assent to the more aggressive firefighting posture taken by ECB bank chief Mario Draghi, even as officials privately warned no short-term action was imminent.”
The Wall Street Journal: ‘Germany, France Back Pledge to Save Euro.’ In a show of unity, after a phone conference the leaders of Germany and France threw their weight behind ECB President Draghi’s pledge to protect the euro with decisive action, delivering a crucial political endorsement for the ECB’s use of its printing press to buy the bonds of beleaguered nations.”
Lacy Hunt, chief economist at Hoisington Investment Management, quoted in Barron’s: “If the central bank [U.S. Fed] injects liquidity it can’t control where it goes. It can go into stocks, but unfortunately in this environment, it will likely fan commodity speculation. It may benefit Wall Street but it will harm the great majority of households that are not doing well.”
To read my weekend newspaper column’ click here: Can ECB and Fed Provide a Sustained Rescue This Time? July 27, 2012.
Subscribers to Street Smart Report: In addition to the charts and our outlook in the premium content section of this blog this morning, there is an in-depth U.S. market charts and signals update in the subscribers’ area of the Street Smart Report website from Wednesday and an in-depth report on global markets from Tuesday.