How Long Will The Relief Rally Last?

The market is rallying nicely this morning on the heels of the headlines out of the EU summit.  I had been skeptical that anything material would come out of the meeting.  Despite the reaction this morning, I don't think the policies they put in place are really enough to tackle their problems.  But I think many market participants had probably gotten too defensive lately.

The EU leaders did say that bailout funds could be used to recapitalize banks directly, as opposed to having to go through the sovereigns.  This helps at the margin, but the 120 billion euros intended to boost the lending capacity of the EIB doesn't seem all that large.  The debt loads of Italy and Spain are well over a trillion euros.

Despite the above, the markets are breathing a sigh of relief at this latest attempt to kick the can down the road.  We have seen this each time the troika has proposes solutions, but the relief rally has faded each and every time.  So the question this time around isn't if we've found the ultimate solution, but rather how long will the current relief rally last?

Spanish and Italian bond yields are lower today, and the euro is getting a big boost relative to the dollar.  This is also helping commodities.  Gold prices are testing the $1600 level, and copper and silver prices are higher as well.  Oil prices have bounce back to $82.25.

The 10-year yield, which has fallen back below 1.60% yesterday is bouncing higher today as funds rotate out of bonds into stocks.  The yield is currently 1.65%.

As for the volatility index (VIX), it had been holding around the 20 level as support, but today it is down 9% back below 18.

Trading comment: The S&P 500 is bouncing back above its 50-day average currently which was at the 1340 level.  The SPX is currently above 1350, and if it can hold above the 50-day for a couple sessions we could see more upside in the market as we head into Q2 earnings season.  But one of the patterns we have started to see already is that companies that are giving cautions guidance for the back half of the year have seen their stock selloff sharply.  Nike (NKE) is the most recent example.  As such, our recent calls for remaining defensive still seem appropriate as we enter this upcoming earnings season.  At the least, I expect trading to remain choppy while we get through the summer months.

KAM Advisors has long positions in NKE