If you are interested in getting an in-depth view of the S+P 500 and the ASX 200, my weekly stock market update is now up on YouTube. You can find it here. I put together these short videos weekly. So if you are a trader interested in seeing someone else’s view on the market, you can subscribe to my channel (for free) and receive an email notification when I upload a new one.
It looks like the whole market is sitting on its hands until we find out the size of the second round of LTRO (Long Term Refinancing Operation) from the ECB. The first round in December 2011 saw the ECB hand out nearly 500 billion euro. This ignited a rally in peripheral European sovereign debt, which in turn ignited the rally in equity markets worldwide.
Tonight we will find out just how much the banks of Europe want this time around. Some are touting figures of between 500-1000 billion. Gold and silver have been rallying strongly in the past few weeks and I suspect it is on the expectation of a large figure at tonight’s announcement.
My gut feel says that banks will gladly snaffle up as much as they can get if they feel there is little stigma attached to taking the money. Europe is heading towards (or is in) recession, so banks may feel that more losses are just around the corner. Why not cash up now in expectation of tough times ahead?
The size of the LTRO this time around will contain some important information. But I think the most important thing to watch will be the price action in Portuguese, Spanish and Italian debt in the weeks following the LTRO announcement. If they fail to catch a strong bid in the weeks following the LTRO (and especially if they start to sell off) I think that will ring some very large alarm bells.
The politicians want the LTRO money to prop up the sovereign debt markets. The banks were willing to buy sub three-year Italian bonds at 7% with LTRO money from the first round, but will they keep loading up on Italian debt at 5%? I’m not so sure. And I don’t think they will do it in enough size to support the huge amount of debt issuance needed over the coming year.
But that is a story for another day. The immediate story is that the market will be frothing at the mouth expecting this latest injection of liquidity to fuel the rally for another few months.
The ASX 200 has been underperforming most markets due to the strong Aussie dollar, but it is on the edge of breaking out above the important 4300 level. If the LTRO is well received you can expect to see a pretty quick move to 4450-4600 in the coming days. I believe the resistance in that zone will be huge and expect any rally to that level will create some great shorting opportunities. Until then though, the technicals point to higher prices in the immediate future.
I do a 10-minute video outlining my technical view in detail every week on a Wednesday. I spend my time talking about the S+P 500 and the ASX 200. It is far easier to explain myself when you can follow along and see the actual charts that I am talking about. You can find this week’s instalment by clicking on this stock market update link.
for The Daily Reckoning Australia