Focus Back on Europe and the G-7

G-7 and Europe is the headline everywhere today. Each and every piece is about HOPE of a resolution. I remember teaching investors for the last 30 years that hope is not a strategy for investing. It is one of the three deadly emotions investors fight every day. Fear, Hope and Greed are always present in our minds as we manage our portfolios. Reading pieces of each story posted, the thread of hope is the theme. The hope of capitalizing the banking system throughout Europe, but predominately in Spain, is the talk. There is the rumored assurance from Germany to participate and keep the EU together. All is well in Euro-land ahead of an “emergency” meeting or teleconference to “discuss” the options to assist or avoid a financial crisis in the Euro zone. Yes, hope spring eternal!

Is this a case of buy on the rumor and sell on the news? If so, it will be short lived as the likelihood of a lasting and sound solution are not that great at this point in time. Europe is trading higher, the euro is back above $1.25, and oil futures were trading up. All is well and it is safe to go back into the water? I have no speculative answer to the rumors surrounding the markets. They are in an oversold state technically, and there is plenty of cash on the sidelines that wants to buy bargains, but… the risk remains elevated. I have stated many time the market can remain irrational longer than you can remain solvent. The reason I am droning on about this today is you have to stay focused and disciplined relative to your overall objective. It isn’t about buying at the bottom and selling at the top, it is all about risk management and investing within your parameters.

What am I watching today? The same things I was watching before the “emergency” G-7 meeting. The S&P 500 index tested support at 1267 on Monday, held and moved slightly higher. Can the index hold this level short term or do we head towards the 1225 support level? The first course of action is to find support and establish a base relative to the decline off the May high. That would give us cause to evaluate remaining short, or believing in the Tooth Fairy, and building long positions relative to the index. If the news is believable about Europe then there will be a bounce, but that doesn’t change the longer term outlook for the global economic picture. Thus, the bias to the downside remains with a short term bounce entering the picture. The news is what investors want to hear, the reality is what happens relative to growth and sustained improvement not just in Europe, but around the world. For now I keep a negative outlook for the S&P 500 index with a stop just above 1300.

The dollar is another story unfolding against speculation. This one is the story of stimulus from the ECB, China and the Fed. The rumor is enough for now to talk the dollar down. The euro moved back above $1.25 on Monday as a result, and the more believable the stimulus is to happen the greater the impact on the dollar. Watch $22.72 as support on UUP, PowerShares Dollar Index Bullish ETF. A break with volume and I would hedge any long dollar positions and watch the price of oil and other commodities. If the premise above with the G-7 produces any “stimulus” or action to keep the EU intact relative to Spain’s banks, etc. the dollar will shrink and the euro rise. This is a story worthy of watching relative to both the short term and longer term implications of the dollar and it’s far reaching impact on other asset classes.

Today promises to be anything but dull. The challenge with anticipation of big events is they never tend to be what the media and others make them out to be. Be patient and let the speculation fall where it may. Watch the S&P 500 index and the dollar today, and moving forward. Both will offer some clues on investor sentiment and opportunities.