IMF and Spain Bailout Banks, Now What?

The IMF allows Spain to access $125 billion to bailout banks, and that is good news to the global markets? The IBEX index is up more than 5% today on the news. Oil is up 1.4% and the futures are up more than 1% in the US markets. Relief is more the catalyst for the move than the bailout. Their is hope that Spain will now be able to work through the issues facing the country relative to the sovereign debt. The reality is it will take more time than many think and it will cost more than the $125 billion budgeted at this point. Yes there is relief in the news, but the recovery hasn’t even begun. Proceed with caution, remember the US markets didn’t recover overnight, and some believe we have still not recovered from the bailout of the banks. There are potential trade setups which were already in motion prior to this data. The news will push some sectors past the entry points and be tempting to chase. Be patient and trade with discipline in this news driven environment.

We start a new week of trading on positive news in Europe. Thus, we wil have a skewed view to start the week versus were we closed on Friday. The short term bias has shifted off the lows on June 4th. Buyers have stepped up the pace of putting money to work and the micro trend shift is in play. The chart below of the S&P 500 index shows the recent low and bounce. A push through the short term resistance near 1340 is the first test on the upside to recapture the momentum and put the buyers back in control of the markets.

The chart below shows the move of the S&P 500 index (bold white line) versus the ten sectors of the index. One thing that jumps out is the correlation of the move. All the sector are moving together like a school of fish. High correlation in the index is a sign of uncertainty and lack of leadership. if the bounce off the low is going to sustain any type of upside movement leadership will have to be established. Based on the current events watch for Technology (XLK), Financials (XLF) and Consumer Services (XLY) to take on the role of leadership. Without leaders the market volatility will return along with the up and down whipsaw we have been experiencing.

We have updated the Watch List based on the events in play. Our short term outlook is to trade the bounce and see how the overall sentiment responds. The initial look is for a trade back towards the previous trading range. If we clear resistance at the 1340 level on the S&p 500 index, the previous trading range comes back into to play with the top near 1367. There is plenty of resistance, plenty of news and more than enough speculation to go around. One day at a time as we look for a trend to develop that will last long than two to three weeks. Remain disciplined and let this play out. Focus on your goals not the news.