The Berlusconi Rally?

There are those who say that the beating wings of a butterfly in China will ultimately manifest themselves as a hurricane on this side of the globe. I have to admit ignorance, something which I’ve become accustomed to over the years. Still, on occasion, the promised departure of an Italian politician, by pushing the Euro up, the Dollar down, and getting traders excited about taking risk, can have an impact on stock markets in the U.S. of A.  The cacaphony of headlines has made it tough to hold onto long positions, at least for me, but there’s no doubt, looking at the chart, that the trend has been up for a month and change.

Trading the past is pretty easy, of course. Getting the future right is trickier.  Let’s switch for a moment to an hourly chart of the SPX:

The recent high was 1292.66 on October 27; today’s push reached 1277.55, and support looks likely to be found somewhere between 1254 and 1247. This chart does indicate that pullbacks will be bought as money managers who haven’t been fully invested during the run up try to make sure that they aren’t underperforming their peers going into year end. There aren’t many multi-year contracts these days, and pension plan sponsors will be looking to fire their worst performing managers and either hire new ones or give more money to the best players on their teams come the new year. 

There remains plenty of headline risk, of course. It could take a while for Berlusconi to actually leave office, and in the interim, he will surely be looking for ways to hang on. Putting together a replacement government won’t be easy, either, but the market’s reaction today clearly indicates that Berlusconi is viewed as an impediment to Italian fiscal reform. If Italy’s ability to pay its debt, and roll over its existing bonds, is established to the market’s satisfaction, Greece can be dealt with, and equities should catch a nice tail wind. The reverse would also be the case; if the spread between the yields on Italian bonds and their German counterparts continues to widen, being short should provide an easier way to profit.

Something else to be aware of is that the UN was informed today that Iran is probably working on developing nuclear weapons, despite its constant denials. This will probably come as a surprise to few here, but it does raise the odds of a strike on Iran’s nuclear facilities. If this occurs, it will inject a lot of uncertainty into the market, at least for the short term, and stocks typically don’t enjoy feeling anxious. I have no way of knowing what the likelihood of an attempt to take out Iran’s nuclear capability is, but it’s certainly more than zero.  Again, just something to listen for.  The market always has to climb a wall of worry.

As always, best of luck.

About the Author Brian Keith


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