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Will the European Union (Finally) Save the World?


Hope springs eternal as bailouts mount overseas.



Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Last Monday, following one of the most negative weekends I can remember -- pundits and Twitter, not my personal energy -- the markets bucked up and held tough, quite possibly paving a path of maximum frustration.

The following day we asked, Is it Time to Fade the Mainstream Media? I mean, everyone was bearish, just as many of our longstanding downside targets were met (the German DAX, for instance, had fallen 14% in a month).

From the low on Tuesday to Thursday's close, the S&P tacked on a snazzy finski (5%).

Last night was the mirror image of the previous week's psychological scrimmage; on the heels of a $125 billion Spanish bailout, Twitter was flush with Sunday Night "I told ya so's!" (I couldn't find a bullish bent a week ago and my feed hasn't changed that much, but that's a story for another time). The point is, the bullish bravado was large and in charge while details of the bailout had yet to be parsed.

I'm a respectful contrarian, which is to say that I monitor the pulse of market psychology while reminding myself that the pendulum tends to overswing either way in emotional and reactive environments. This works on virtually every time frame and has seemingly increased over the last five years. I shared last Monday that "it got too bearish" out there; now, I'm starting to feel that it got too bullish, too quickly.

For starters, we've got the specter of moral hazard in Europe. How does Greece -- which holds an election June 17 -- react to the terms in Spain? Ditto Portugal and Ireland, which are also "under the thumb," so to speak? It's one thing for John Q Populous to be all sorts of pissed that banks benefited from a stateside bailout that left them twisting in the wind; it's another for a sovereign nation to feel slapped silly and slighted.

I'm not an alarmist but you know the direction of the unintended consequences and unfortunately, it remains on track.

Back to the here and now, the futures traded up to S&P 1340 last night, which is current resistance on our stair-step risk management process. While I have been operating in a surgical manner -- using Apple (AAPL) as a long rental and Google (GOOG) as my short rental (they have mirror image head & shoulder patterns), the majority of my powder is dry as I await to see the whites of their eyes.

Trust me, I'm looking forward to a more committed stylistic approach once the sovereign sequel settles but with Spanish yields higher and Italian stocks lower this morning -- and Greek elections coming up quick -- I'm not convinced we're there yet, particularly given stateside stocks ran into this news. BKX 44 remains a key tell -- we're trading at that level now -- so stay on your toes and keep your right arm up as we together find our way.

Random Thoughts

  • THE smartest policy guy I know -- who happens to be a pretty snazzy trader in his own right -- tells me that the best, and perhaps ONLY viable overseas solution is to give the European Union lots of (fiscal and monetary) drugs and unwind it before it unwinds us all. The problem, in his view, is that when it's on drugs, policymakers will again confuse that with a sustainable solution.
  • This is the sorta sentiment that should help social mood abroad. Or not.
  • I sat tight with my right-sized short exposure -- the primary vehicle is Google, which was added into Thursday's gap higher above $585 -- over the weekend and we'll update our exposure in real-time on the Buzz & Banter (click here for a free two-week trial).
  • I shared this last week but it's so awesome, I've gotta share it again -- check out this Inflation Propaganda circa 1933 (hat tip: Don Bull).
  • Apple and Google are more or less the same price. Stamp a ticket; I would be long the former and short the latter for a trade, but that's just me.
  • As discussed last week, Deflation Is the Elephant in the Room. If you missed the column, it's worth a sniff.
  • Gold is seeing more swings than a Hedonism vacation (sorry) and while I'm not involved, I'll offer that a) if and when the phantom arrives, it won't bode well for the yellow metal, and b) the chart below offers valuable perspective.
  • We asked last week, Is the Action in Gold Signaling a Downdraft for Stocks? and it's worthy of a re-post. The tape hung tough late last week despite the flight from commodities. As commodity volatility typically precedes equity movement, we would be wise to pay attention to the yellow metal.
  • Gold screamed higher two Fridays ago, rallying an eye-popping $80; two sessions later, the S&P began a two-day 50-handle lift higher. Since last Wednesday's high tick, gold was down more than $60 at Thursday's low tick; and we offered that it remained to be seen where the S&P would be in a few days -- and that few days has arrived. Check out the chart below -- gold vs. the S&P -- to see what I'm seeing.
  • Escape from New York! The move has officially arrived as the kids and cats are already out east while Jamie and I finish the packing (I got the hall pass to come to work this morning but I'm officially "on call"). I'll have one month of super-commuting before we settle into our new home and it's all good. I've dreamed of a white picket fence and 2.5 kids for many moons and if you put something into the universe enough, it has a way of coming full circle.
  • Good luck today, and trade like a Minyan!

Twitter: @todd_harrison

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