After what was truly a bad hair Friday,

the stock market failed yet again to bounce on Monday. The backdrop to this is the fact that market participants are devoting more and more attention to the notion that the economic recovery, bought with the biggest barrage of ‘stimulus spending’ and monetary pumping ever, is beginning to flounder.


This continued failure by the market to even engage in a standard-sized retracement bounce (to, say, the 1130-1150 level in the SPX) in spite of being ‘oversold’ in the short term has to be viewed as rather disconcerting by bulls. Naturally, such a bounce could still eventuate, but it is our impression that too many people have been waiting for such a bounce to either sell what they hold, or be presented with a comfortable level to go short from.

When a large majority of market participants needs or wants a bounce for the purpose of selling, it usually doesn’t get one. A similar effect can be observed in run-away bull markets, when many participants don’t want to buy into an ‘overbought’ market, but instead wish for a pullback that they can use to buy. As a rule, such a pullback then fails to put in an appearance. The euro-area debt crisis continues to provide ammunition to the bears.

As the German version of the Financial Times reports:


“Die europäische Schuldenkrise reißt inzwischen auch die Anleihen Frankreichs, der Niederlande und Österreichs nach unten. Der Renditeaufschlag zu deutschen Bonds mit einer Laufzeit von zehn Jahren lag am Montag für die Franzosen bei 47, für die Niederländer bei 36 und für die Österreicher bei 67 Basispunkten.

Zum Vergleich: Die Durchschnittswerte liegen laut Bloomberg bei 29, 24 und 45 Basispunkten. “Inzwischen wird die gesamte Währungsunion in Zweifel gezogen. Das ist wirklich besorgniserregend”, sagte Kornelius Purps, Anleihenstratege von Unicredit . “Warum das passiert, ist schwer zu erklären. Es handelt sich um eine Ansteckung.”

Anleger flüchteten in die aus ihrer Sicht sichersten Anleihen. Das seien deutsche, amerikanische und japanische Anleihen, so Purps. Diese Papiere “sind die letzten Mohikaner”, die noch gefragt seien.”

Translation: “Die European debt crisis in the meantime drags the bonds of France, the Netherlands and Austria down as well. The spread between 10 year German bunds and the equivalent bonds for France was at 47 basis points (bps), Netherlands 36 bps., and Austria 67 bps.

By comparison, the long term average of these spreads lies at 29, 24 and 45 bps. According to Bloomberg. “In the meantime the entire currency union is being doubted.

“That is truly worrisome”, said Kornelius Purps, bond strategist at Unicredit. “Why this is happening is difficult to explain. It is contagion.” Investors are fleeing into the bonds they regard as the safest. These are German, US and Japanese bonds, according to Purps. These securities represent “the last of the Mohicans for which there is still demand.”


If you’re down to the ‘last of the Mohicans’ in the universe of sovereign debt, the situation can probably be described as somewhat dire. This doesn’t keep well-known perma-bulls from sticking to their forecasts.

As an example, Goldman Sachs once again wheeled out Abby Joseph Cohen yesterday (the very minute she opened her mouth, the stock market began to slide, which is an odd parallel to what happened last time she was wheeled out, in May).

According to Cohen:


“Potential bad news even under the most unlikely scenarios are discounted in share prices here and in Europe,” she said. Rather than focusing on isolated events such as Friday’s disappointing jobs report, Cohen encouraged investors to look at the big picture. “We believe the place to start, of course, is the underlying health of the economy, whether GDP growth will continue and whether job creation will begin to improve,” she said. “That’s something we’ll be watching in the quarters ahead.”


Potential bad news under the ‘most unlikely scenarios’ are ‘priced in’? Although the article didn’t mention what those ‘unlikely scenarios’ were, we profess to be rather doubtful of this assertion. ‘Unlikely scenarios’ in Abby’s world are ‘things that might prove to be bearish’. Such as a credit crisis, say. Well, there is a credit and currency crisis playing out right now.

To us it doesn’t appear that the markets have already discounted any of the potential worst case outcomes. It rather appears to us that there is still a fair amount of complacency about what those worst case outcomes might entail. Somehow we think that Europe and its moribund banking system and foundering sovereign debt are a shade bigger, as problems go, than e.g. Lehman’s bankruptcy was. But that’s just us, we are not as expert in foretelling the future as AJC.

The charts below indicate that the stock market is at a very critical juncture, and other markets we watch for the purposes of intra-market correlations seem to indicate that the ‘critical period’ has not yet concluded. Retracement bounces against the recent trends may of course happen anytime, but we’d be careful not to read too much into those were they to occur. Credit crises have a habit after all, of producing disappointing outcomes for investments in so-called ‘risk assets’.


The daily chart of the S&P 500 index. Yesterday the market closed at the lowest point since November of 2009, unable to bounce even after Friday’s harsh decline. A few slight divergences are beginning to pop up, which may support a short term bounce. Note however that the market is right at critical weekly support. A break lower from here would be bad news indeed – click to enlarge.


The weekly SPX – as can be seen, it sits right above a critical zone of lateral support – click to enlarge.


3 month LIBOR vs. the t-bill rate: the TED spread continues to rise, a sign of interbank funding stress. The charts of Libor and 3 month LIBOR continue to strike us as ominously bullish (i.e. they continue to indicate that even higher rates may be on the way) – click to enlarge.


A weekly chart of the euro shows that while the currency is deeply oversold, it has broken critical lateral support already. This support area may serve as resistance on any forthcoming bounces v – click to enlarge.


The state-less currency continues to rise, as worried investors increasingly seek it out as a safe haven in the wake of declining faith in the ability of governments to keep the ongoing crisis in check.


At least there is some use for the euro, it appears.

(Photo credit :


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