The Problem With Greece

Can Greece leave the Euro and the rest of the world keeps moving along? Turmoil in Greece and a call by the leftist Syriza Alexis Tsipras to reverse what he calls ‘barbarous austerity” has put the future of the entire Eurozone in doubt. While it is unlikely that Mr. Tsipras will be able to form the necessary coalition to gain power, the uncertainty about Greece’s future plans could hurt the Euro.

Pressure brought on by voters in Greece to try to roll back plans to cut the budget and pay its bills could destroy the European Central Bank plan to avoid a total default. Now the question is whether a Greek exit would be catastrophic or is it destined to happen regardless.

The fear of a Greek exit has not been just about Greece but fear of contagion. If Greece exits the Eurozone, what will happen to other weak members of the zone. If Greece is allowed to just default and walk away after taking others cash that they lent to Greece in good faith, others will have a precedent for an exit strategy. The question of moral hazard now comes into play. If Greece can take the EU money and then walk away, why then would another EU country move to help another EU member?

Of course this raises the larger question of the problem....Read the entire article.

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Two Short Term Scenarios for the S&P 500 Index

For the first time since the last week of December of 2011, the S&P 500 Index closed lower on the weekly chart. Recently I have been discussing the overbought nature of stocks based on a variety of indicators. However, the real question that should be asked is whether last week was just a short term event or if we see sustained selling in coming weeks.

The issues occurring in Greece spooked the markets somewhat on Friday as Eurozone fears continue to permeate in the mindset of traders. The U.S. Dollar Index is the real driver regarding risk in the near and intermediate term future. If the Dollar is strong, market participants will likely reduce risk. However a weakening Dollar will be a risk-on type of trading event which could lead to an extended rally in equities, precious metals, and oil.

Friday marked an important day for the U.S. Dollar Index futures as for the first time in several weeks the Dollar held higher prices into a daily close. The U.S. Dollar appears to have carved out a daily swing low on the daily chart from Friday. Furthermore, the potential for a weekly swing low at the end of this week remains quite possible. The chart below illustrates how the 100 period simple moving average has offered short term support for the past few weeks.

U.S. Dollar Index Futures Daily Chart

I would also point out that the MACD is starting to converge which is a bullish signal and the full stochastics are also demonstrating a cross on the daily time frame. As long as the 100 period moving average holds price, a rally is likely in the U.S. Dollar Index in coming weeks.

Should that rally play out, it will likely push risk assets lower. My primary target for the S&P 500 would be around the 1,300 – 1,310 price range if the selloff transpires. It is important to note that  headlines coming out of Europe could derail this analysis in short order.

Assuming that a selloff in the S&P 500 occurs it will present a difficult trading environment for market participants. Market participants are going to be in a tough position around the 1,300 price level. A rally from 1,300 could  serve to test the 2011 highs. In contrast, a confirmed breakdown of the 1,300 price level could initiate a more significant selloff towards the 1,250 area.

Should price move towards the 1,300 price level the bulls and bears will be battling it out for intermediate control of price action. This is my preferred scenario for the short term time frame, but I would only give it about a 60% chance of success at this point in time. We simply need more time to see how price action behaves the first few session of the forthcoming week.

S&P 500 Index Bearish Scenario

The alternate scenario which has about a 40% chance of success would be a sharp rally higher which likely would be produced by news coming out of Greece and/or the Eurozone that pushes the Euro higher. Right now risk is high due to the sensitivity of price to headline risk. With that said, the bullish alternative scenario is shown below.

S&P 500 Index Bullish Scenario

At this point we just do not have enough price information to give us clarity regarding the most probable outcome. The price action in the Euro is going to drive price action for the S&P 500 and other risk assets in weeks ahead.

Anything is possible in the short term, but I have to give a slight edge to the bears simply based on the price action Friday and the fact that almost every indicator I follow is screaming that the equities market is severely overbought. The price action this week should be telling. Headline risk is excruciatingly high, trade safely in the coming week!

By: Chris Vermeulen – Get Chris' FREE Weekly ETF Reports & Analysis
Co-Author: JW Jones – Get J.W.s FREE Weekly Options Reports & Analysis

BOE may Ease Further, Conforming to Our View on Low Rate Environment

Crude oil recovered modestly but remained hovering around 75 level as the market awaits the oil inventory report. Stock markets were mixed in Asian and European session so crude failed to benefit much despite its strong correlation with equities. Gold resumed the uptrend after profit taking sent price to 1274 yesterday. Currently trading at 1294, the benchmark contract for gold has gained in 5 out of the past 7 days due to macroeconomic uncertainty and the Fed’s move closer to additional easing.

Stocks gained in Asian session as driven by Australia and Hong Kong shares. Just 2 days after RBA governor Glenn Stevens saying that Australia’s economy will growth above trend in 2011, Westpac Leading Index unexpectedly rose +0.4% m/m in July, following a contraction of -0.1% in the prior month. Australia’s S&P/ASX Index added +0.21%. In Hong Kong, the Monetary Authority said the city will grow at a moderate rate through the end of the year. This lifted the Hang Send Index by +0.21%.

In Europe, equities were generally lower with benchmark indices losing 0.5-0.9%. Eurozone’s industrial new orders surprisingly fell -2.4% m/m in July from a downwardly revised +2.4% growth in June. The market had anticipated a milder drop of -1.4%. As stated in the minutes for BOE’s September meeting, economic data released in the past month has showed a ‘reduction in growth prospects’. The minutes also revealed.....Read the entire article.

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Refiners In China At Risk As The Government May Delay Price Hike

Crude oil price rebounds to 70.2 in European morning as strong China PMI eases demand worries. Trading will likely remain thin before NY session opens. The US government will report ISM manufacturing data today. After market close, the American Petroleum Institute will report its estimates on oil inventory last week and this will act a guideline in forecasting the figures by the US Energy Department. Stock markets in Europe drop. UK's FTSE 100 Index slides -1.4% to 4843 while Germany's DAX and France's CAC 40 lose -1.6% and -1% respectively. UK's manufacturing PMI slipped to 49.7 in August after rising to 50.2 in the prior month. This disappointed the market as consensus forecast was a further gain to 51.5. In the Eurozone, unemployment rate rose to 9.5% in August from 9.4% a month ago. Although the reading came out as expected, it's indeed the highest level in 10 years, suggesting the 16 nation region' s job market remained weak.....Complete Story