The Cyprus rally lasted about 40 minutes on Monday. Then the reality of what may be done would only offer chaos in the financial services sector in Europe. That sent the European markets lower, bank stocks lower and in the end, it left more questions than answers. What does it all mean both short term and long term? I will be the first to admit there is nothing certain, but taking money from depositors to keep the government alive… can’t create a positive outcome, regardless of the spin put on the tax. What are some potential side effects?
Mass exodus of money to safety by the PIGS. Not the four legged kind, but the nations that got the nickname when the crisis started. What would happen if all the depositors started withdrawing from the banks in Portugal, Italy, Greece or Spain? This is a legitimate concern and it would start a flight to safety by avoidance of the banks that can seize or levy assets with an unjustified excise tax. This exodus would disrupt the financial systems in these countries which are already skating on thin ice. It could lead to people leaving these countries for other opportunities. In other words, it could get ugly quickly if fear escalates.
Taking this to to the market level on Monday, Italy (EWI) was down 4 percent, Spain (EWP) was down 4.6 percent and Europe (IEV) off 1.5 percent. The EAFE index (EFA) was influenced by the activity as well dropping 1.2 percent. The lack of interest in buying stocks was directly attributed to this act of “saving” the banking system in Cyprus. The reality is it was to save the existing government. How this unfolds is going to take time, and it will create opportunities. The challenge is to be patient and let them present themselves, one day at a time as we go forward.
What about possible retaliation by Russia economically? The fact that German and other European Union companies are doing business in Russia, could signal some trouble down the road? Why? For the simple fact that ‘everyone’ (Russia) believes that Germany is pulling the strings of the ECB and the EU to act on this issue aggressively. Given the fact that Russia has such a high concentration of assets in these banks it would be a bad move politically to bite the hand that feeds you. This will be something to watch closely as it unfolds.
Enough of all that as it will take time to unfold. What happened on Monday in the market that offers any potential opportunities?
- SVXY – the short VIX ETF is trading at the neckline of a reverse head and shoulder pattern. There was an attempt to move higher before the selling started mid morning. If the upside is validated in the broad S&P 500 index, this fund will break higher as well. The risk of the fund itself is high as it tracks volatility. But, it will give some insight to what is on the horizon short term for the broad index.
- OIL – Crude oil broke above resistance as the ETF cleared the $22 resistance level. Prior to the roll out of the Cyprus issues last week we were looking for a break above this level. However, the impact of the Europe on the price of crude is, and will remain, a big question mark to the upside. This is worth tracking for a follow through on the upside to oil and our current positions.
- XLK – Technology ETF is stuck in a tight trading range. The move back to the top end of the range in early trading, ended at the bottom of the range as worries about Europe settled in. We are looking for some leadership in the Semiconductors (SOXX), but they have stalled as well. Oracle’s earnings last week took the steam out of the software (IGV) sector. Networking has struggled to keep pace, and the internet sector (FDN) has down well with the recent run in Google. Looking for a decision… up or down from the sector short term.
- Industrials and basic materials have both reversed their recent gains. The earnings data has not helped from Caterpillar and Federal Express. Commodities are weak and keeping the material stocks in check. The challenge going forward in these sectors will act as a drag on growth. The key interest is if they will lead the downside short term?
- Emerging markets (EEM) remained in a downtrend off the high in January. That accelerated and broke support the last two weeks and now it is at another critical decision point. Will the sector hold support or take steps towards the next leg lower? With commodities struggling to gain any upside traction in the current market environment, this sector is likely to struggle more going forward.
We could talk about many more sectors of interest, but that would become overwhelming. The goal is to remain focused and disciplined in our approach to managing money as well as the risk it presents in the current markets. One day at a time as it all unfolds.