Thursday, June 28, 2012

Read the market reaction, not the Summit statement

As we approach yet another crucial European summit, the bargaining is becoming more intense. While the Merkel quote of "I don't see total debt liability as long as I live" got the headlines, there is no doubt a lot of jockeying behind the scenes. Various proposals are being floated, including a package of "banking union, a fiscal union and further steps towards political union", and intense pressure is being put on the Germans to yield.

The forecasts are all over the map. While the consensus is that Germany will have to eventually bend on the issue of eurobonds, though not necessarily at this summit, others like Ray Dalio (via Zero Hedge) say, "Don't count on it!"

While I am not expecting the Germans to change the lines of their national anthem to Europa, Europa Ă¼ber alles, nor do I expect an admission of failure this summit. Most likely, we will see the typical European fudge, or an announcement of "we have a secret plan to have a plan."

While I am mildly interested in the summit statement, I am much more interested in the market reaction. If I am right and we get a "we have a plan to have a plan" kind of announcement, will the market rally or sell off? Gauging the market to news gives me much more important clues as to whether the bulls or bears are in control of this market.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


SwissWiss said...

How about the market-in-a-padded-cell theory--bouncing off the walls of a trading range (12,100 to 12,900) madly doing the same things over and over using a few obsessive routines, such as: buying on the rumor (Summit) selling on the news (post-Summit),dead cat bounce (down 200, then rally to recover), and the always popular 3:30 p.m. hockey stick. Bernanke has padded the cell with cheap dollars. There is no escape down or up -- just side to side. Succeeding is simply anticipating and trading on the routine of the day (risk on, risk off). If this theory is right -- unless there is outside intervention -- expect a sell off after the Summit (sell on news routine). But don't expect a breakout -- the whole point is to keep us locked safely inside.

Best Business Brands said...

The immediate reaction by the markets was quite positive. S&P 500 futures contracts were up 1.5% when the Japanese market opened last night; Asian and European markets were up roughly 2%.