The old Wall Street adage that ‘trees don’t grow to the sky’ is another way of saying that all good things must come to an end. Come to think of it, all bad things must come to an end too. Everything in life has a beginning, a middle, and an end. In financial markets, figuring out where you are in this life cycle is the difference between making money and losing it.
We are closer to the end of Europe’s experiment with a common currency than we are to the beginning. The end of the story will almost surely include a smaller euro with a few nations at the core. But the middle can be dragged out for a long time. Between the middle and the end, you can choose whether to watch or to trade…or to begin building your bunker out in the bush.
This may be a good week to trade. Opinion polls for the Greek elections show pro-bailout parties gaining ground. A new government should be elected on June 17th. If the pro-bailout parties win, Greece will stay in the euro a bit longer. This could give the Europeans time to figure out a Federal fiscal union, or time to discover that they can’t agree on one.
The markets seem to like the idea of Greece staying in the euro. It means catastrophe averted. And for what it’s worth, we reckon the euro is a bit oversold now anyway. We said as much in our Friday update to AWG readers, and then chucked in the chart below. A reading below 30 on the relative strength index (RSI) has coincided with past short-term bottoms in the euro.
For what it’s worth, the XEU traded lower on Friday in the US and closed at 125.17. We were wrong for a day. But it’s up nearly half a percent in trading this morning in Tokyo. This could confirm our theory that human beings can only stand depression and bad news in certain quantities. Prolonged states of anxiety and fear sap your will to live (and diminish your cognitive performance). We’re not sure how that translates into price action on the market, but our hunch is that we’re due for a counter-trend rally.
By the way, what people tell pollsters is often different from what they actually do behind the curtain of the polling booth. It takes real confidence, or someone who relishes being a jackass, to tell a pollster the opposite of what he wants to hear. When asked questions in public, most people like to give answers that flatter them. But when they are all alone away from the prying eyes of the pollsters, people usually do whatever’s in their heart.
That’s the interesting question about the Greece election. Will Greek voters fear the uncertainty of a world where they’re the first Europeans to exit the euro? The concerns they have are certainly valid. It’s a dangerous path. Or will anger, pride, resentment, and defiance win out? Hmm.
We’ll let you know what we see first-hand from Europe. We’re headed over to Paris later this week for a business trip. It’s hard to imagine anyone being overly-stressed in Paris in the month of June, but you never know. In our absence, we’ll turn the controls over to the Murray Dawes and Nick Hubble.
for The Daily Reckoning Australia
From the Archives…
2012-05-25 – Eric Fry
2012-05-24 – Greg Canavan
2012-05-23 – Dan Denning
2012-05-22 – Bill Bonner
2012-04-21 – Dan Denning