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The Three Keys to the Stock Market


You can learn a lot just by watching.


The most important juncture in stock market history continues, until such time that the next most important juncture arrives.

With last night's vote of confidence, Greek Prime Minister George Papandreou remains the man with a plan, and his plan calls for €28 billion ($40 billion) of budget cuts. While last night's results make it more likely that these measures will pass through the Greek parliament, it promises to be a contentious path rife with social strife. Eurozone finance ministers will next meet on July 3, so the Greeks have roughly a week to get their financial house "in order" (if we can still call it that).

I was doing a segment on Bloomberg TV as the vote was being conducted last night at 5:30 PM -- being asked for a forward opinion into a binary event is awesome -- and opined to Pimm that a no-confidence decision would have likely triggered a "limit down" opening, while traders could well "sell the news," particularly if we gapped higher on the opening. That's not in the cards -- the futures are indicated down small -- so that plan is off the table; you trade the market you have, not the one you want.

I will share that after I finished the segment (and met the fam for some CPK around the corner), I pulled up the global market futures and was surprised to see no upside traction on the back of the perceived positive catalyst. The easy explanation is that the market priced this vote in on Monday and Tuesday. That makes sense; the harder extrapolation is whether investors sell the news from here.

Put a gun to my head and I'll say that we're playing hopscotch in a minefield, but that opinion and $2.25 will get you on the subway. As I reiterated on the tube last night, there are three primary tells (ex-Greece) that are on my radar. In order of perceived importance:

  • The Dollar: If the greenback rallies, it's a stiff wind in the face of the bulls. A lower dollar, conversely, is a necessary precursor to -- but no guarantor of -- higher asset classes. The DXY is currently trading at the midpoint of the recent range and sitting on the 50-day moving average (DXY 74.60). A move higher through DXY 76 would be technically significant.

  • Lower Highs: I will draw your attention to three charts: the S&P, NDX, and BKX. Each has a different field position relative to its respective 200-day moving average (the S&P held the first test and rallied, the NDX broke below and rallied back above (yesterday), and the banks are in a world of hurt unto themselves). Still, all three share the same patter of lower highs, which is traditionally a sign of distribution.

    Click to enlarge

    Click to enlarge

    Click to enlarge

  • Leadership: While the markets have enjoyed a spirited stretch, that simply worked off the oversold condition. If the bulls are going to stretch their legs from here, we'll need to see the Generals dust themselves off and lead by example. JP Morgan (JPM), Goldman Sachs (GS), Google (GOOG), and Apple (AAPL) are the five-star guides in that regard.

I said it before and I'll say it again; Greece isn't the problem, it's merely a symptom, and yesterday was yet another step in the "extend and pretend" process that has engulfed our world for quite some time. That doesn't mean we can't rally, but we need to qualify the move and acknowledge the distinction between a rally and a legitimate economic recovery.

As that's murky at best, my tactical game-plan remains in place: stair-stepping between S&P 1250 and S&P 1350 and watching our tells for guidance as we together find our way.

Good luck today.


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