Market Update
Europe is back in the news with Spanish banks in trouble. Interestingly, until very recently Spanish Prime Minister Mariano Rajoy denied that Spanish banks needed assistanceat all. It is always the same, deny, deny, deny….until you have to admit the truth. At the current time it appears that Europe is trying to put together a rescue package to help the Spanish banks. In all likelihood a package will materialize. It is diffi cult to say where the funding will be sourced: ideally it would be sourced from the EFSF, but its statutes only allow bank recapitalization through a sovereign government. Europe has proven itself to be a master of developing methods and special funds to break its own rules.
Rajoy is insistent that the recapitalization should not go through the Spanish government and should be direct to the banks. Basically, he wants to avoid the stigma of a bailed-out nation and any austerity measures that may be
Cont….page 3 (full Market Letter)
S&P 500 Technical Status
I was almost premature last month on calling a target of 1250 for the S&P 500. On June 1st the S&P 500 almost reached the target and closed at 1278, just below its 200 day moving average. The market has since bounced strongly and is just short of its resistance level of 1350. Ceteris paribus, everything else being held constant except normal market action, the market is going to have diffi culty getting through the 1350 level. If it does, look for a challenge up to the April high just above 1400. I say this knowing full well that in current times there is no such thing as normal market action. If Europe comes up with an aggressive solution to solve their on-going crisis, the market will respond positively. If Greece elects a government that is anti-austerity, the market will respond negatively. It is very difficult to predict these exogenous varaibles that can move the market strongly one way or the other.
On the downside I still expect the S&P 500 to reach at least 1250. If Europe, in typical European fashion, continues to muddle through their problems and present iterative solutions that are barely enough to solve the immediate crisis, then it is very conceivable that the market will challenge the 1150 level. The S&P 500 is currently in the 1250-1350 channel that was established over a number of months last year which is a signifiant channel and if it is broken to the downside on strong volume, a challenge at 1150 is very conceivable.
Given that we are still in the six month unfavourable season it is best for investors to remain conservative. Despite a conservative stance, a possibe tradeable rally may exist from late June until mid-July, as the market typically anticipates positive earnings from U.S. companies. Overall investors should remain cautious in their positions.
