Todd Harrison: The ECB Loads the Bazooka
The stock market edges toward resolution.
European Central Bank President Mario "I must break you" Draghi signaled possible action using "unconventional measures" next month, offering that the "high exchange rate is a key downside risk for the eurozone economy and we could act as soon as June if needed."
We had Janet Yellen jawbone yesterday and Mr. Draghi jawbone today, and the reaction to news will be more important than the "news" itself. If the tape ignores the vernacular, the collective wisdom will be left to wonder how many bullets are left in the central bank's arsenal.
As there's a lot going on this morning, let's dive into some Random Thoughts in no particular order:
I nibbled on some SPDR S&P 500 ETF Trust (NYSEARCA:SPY) puts yesterday morning (before the dip and rip) -- a particularly small position, as I expect volatility to expand -- and, when I saw Twitter (NYSE:TWTR) trade below $30 in the late afternoon, I scooped some stock at $29.99. Time will tell if either or both pan out.
- I've updated the Bloomberg Smart Index below, which is still yawning for resolution.
On the "blended volatility compression" side of the equation, I'm not surprised to see the Weekly Equity Investor Sentiment Index with the highest "neutral" reading since 2003.
- As a point of perspective -- and this is why CBOEO EX implied Volatility (INDEXCBOE:VXO) is NOT a timing mechanism -- the last time the "neutral" reading was this high was in 2003, when we were about to embark on a three-year volatility compression that weeded out hedge funds and made trading quite difficult.
The Russell 2000 (INDEXRUSSELL:RUT) closed below the 200-day for the second straight session; RUT 114.50 is the level to watch on a closing basis.
- Meanwhile, KBW Bank Index (INDEXSP:BKX) 67, a triple bottom, and the 200-day, may be the most important level in the marketplace. Per the chart below, which juxtaposes the BKX against the S&P 500 (INDEXSP:.INX), one thing is clear: Either the banks must rally or the S&P will sell off, or a combination thereof.
The excellent Jason Goepfert of SentimenTrader offers this nugget: In 35 years of history, this is only the third time that the NYSE Composite Index (INDEXDJX:NYA) was sitting at a 52-week high one day, and the next day the Russell 2000 had fallen below both its 50-day and 200-day moving averages. The two precedents occurred on March 12, 1999, and November 1, 2007, which is disturbing as it preceded the last two bear markets. It's tenuous (!) to place a lot of weight on a sample size of two, though this is another warning that the divergences we've been seeing lately haven't had positive outcomes the majority of the time.
- And the bull case for the S&P? Right here.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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