Will Europe Dominate the Markets Attention?

Sentiment towards Europe is spooking investors again. The outlook is for nothing new to happen in the meeting of European leaders later this week, and that news didn’t sit well with investors. What Germany is willing to do, versus what many are asking them to do, is a great divide. Thus, the hope of an orderly solution to the financial issues facing the European Union seem to be dwindling, and that is creating stress on Wall Street. This is not a surprise and the same issues have been laid out in past meeting with similar results, empty promises and no progress. Unless something significant happens to change Germany’s mind, there will be no solution in this meeting. Thus, watch how the global markets responds near term along with the US.

That brings us to the next big challenge looking forward, does the market continue to sell off until which point in time there is a solution? Or, do we continue this up and down activity on each piece of positive or negative news, rumors or speculation? There in lies the reason for the current indigestion in the market… indecision.

As Europe comes to grips with the fact that Germany holds all the cards, the balance of the investment world is coming to grips with the ramifications of the outcome. The speculation is that Germany will issue bonds themselves and take gold as collateral. That is an interesting approach and gives new meaning to the golden rule. In the wave of the renewed fear trade where is money rotating? The dollar continues to be one benefactor to a weaker euro. Gold gained $21 to $1588 an ounce. The 30 year Treasury bond gained 1.4% as the yield sank to 2.68%. The usual suspects are gaining in response to fear rising. The VIX index jumped back above 20 on the day, and a move above 21 is another negative for the broad markets.

It is decision time for the major indexes as they rest on the lower level of support. The S&P 500 index needs to hold above 1305 if the current micro trend is to survive. It doesn’t look good relative to what is happening in Europe and the renewed fear in play.

Biotech (IBB) is the one sector holding up well and providing some leadership. The drug stocks within the sector are performing the best. The sector broke from the trading range last week and has held the move. With the new home sales data (up 7.6% in May) the upside for the homebuilders has remained as they tested the move higher, but are holding steady. Building materials are doing equally as well with LPX, HD and others holding the upside as well. Large cap names are holding support, and not in bad shape as investors have been more willing to hold the dividend stocks.

The downside is littered with the growth stocks that concern investors under the current circumstances. The semiconductors performed the worst on Monday dropping 3.4% and broke support. The technology stocks were providing some leadership in the bounce off the June 4th low, but they have just as equally provided the leadership on the downside. The short play in semiconductors is looking attractive with SSG. Energy is the other sector providing plenty of downside for the broad markets. Oil was back below $80 and testing support intraday at the $78 level. Gasoline tested support again at the low and bounced. The oil services stocks dropped more than 3% and broke the low from last October. The downside pressure is building in the energy sector as the demand side of the equation remains weak.

The downside momentum is building. The outlook is what matters. Investors want visibility of growth on the horizon, and it isn’t there currently. The issues in Europe are keeping a lid on the markets and it may be the catalyst to further downside if the meeting with the EU leadership doesn’t produce some reasonable, and at this point believable, resolution to the brewing debt crisis.

Cash is king for now and we will take this one day at a time as it unfolds and the trend is established.