gainspainscapital/ April 16, 2012 / by Graham Summers, Chief Market Strategist, Phoenix Capital Research
The markets have entered a very dangerous environment in which even the usual market props (Fed Presidents calling for more easing) are being overridden by market concerns for Europe.
To whit, last week, not one, but two Fed Presidents (Yellen and Dudley), called for more easing/ QE. On the very same day (April 11), the ECB issued a similar statement regarding the potential for more easing.
At any point in the last 18 months, these sorts of statements would have kicked off a sharp rally in stocks. Instead, last week stocks posted a one day gain (the verbal interventions were on April 11) only to only to roll over again and close the week with their worst performance thus far in 2012.
This should be cause for major concern. As I’ve noted numerous times on these pages, the Fed has largely been engaging in verbal rather than monetary intervention since May 2011. Indeed, at one point I even facetiously noted that the Fed got more “bang for its buck” by having its biggest dove (Charles Evans) talk up stocks rather than money printing (QE 2 pushed the S&P 500 up 11% while various Evans verbal statements produced a 12% gain).
So, for the market to tank despite two Fed Presidents hinting at more QE (as well as the ECB engaging in similar comments) should be a major warning sign that selling pressure is creeping back into the markets in a big way.
With that in mind, this week is a bit of a toss-up. It is options expiration week, so we should see the usual upwards manipulation by Wall Street.
However, at the same time, the markets are waking up to the reality that Europe is about to enter its real Crisis (Spain) at the very time that European elections, particularly that of France, are favoring leftist socialist politicians who are completely opposed to fiscal austerity.
Indeed, the situation in Europe is fast approaching a confluence of factors (political, technical, fundamental, and economic) that has the potential for an absolute disaster to unfold in the next six to eight weeks.