European upheaval

S&P500 daily, end of day

Interesting to see the outcomes of French and Greek elections.  The Euro crisis fell off the front page last fall and now it looks like it is trying to nudge its way back into spotlight with key political upheavals in France and Greece.  But with all the negative talk by market pundits, the indexes held their ground today and were flat in the face of this news.  Much of that can be attributed to the market expecting these results as they were telegraphed by pre-election polling over the last few weeks. But while the actual result was expected, the consequences might not be priced in.

The problem with new govts in Greece and France means the political negotiations that took place last summer will need to be rehashed and all the uncertainty and infighting that went along with last summer’s volatility will be front and center yet again.  Since we’ve already been there and done that, I don’t expect the same amount of uncertainty, volatility, and sell-off as we saw last summer, but as everyone knows, the market hates uncertainty and no doubt this will weigh on equities.

Today’s lack of a sell-off is most likely due to the expectations that France’s and Greece’s new ‘socialist’ govts will give up the economic crushing austerity plans and instead support a more growth oriented easy money agenda.  And ultimately I think this will be a good thing for Europe and the global economy, but the near-term battles with fiscally conservative Germany will muck up the waters and the market hates uncertainty. Can the markets continue ignoring the Euro mess as it has done for the last several months, or will new infighting and breakdowns bring the story back to page one?

Ultimately I expect this will all work itself out, but over the near-term it will be hard to justify the bull-case in the face of this turmoil and the market could struggle over the summer because of it.  The market is facing an uphill battle between headline-risk and if we fall a little lower, the technicals will also be supportive of a sell-off.  For the adventurous looking to make money on the short side, now would be a good time to ready a watch-list with high-flyers that have struggled recently.  Look for the market and these watch-list stocks to break resistance on high volume and jump on board the downdraft.  But I expect this downward move will be fairly moderate, so be prepared to lock-in worthwhile profits and don’t let yourself get greedy.  Just like last fall, I expect the market will find its footing once the it realizes the fear is unjustified and the outcome becomes more clear.  This will lead to another nice year-end rally.  Of course the further away the predictions are, the less reliable they become so we will need to continue revising our expectations as events and price action unfolds.

And as always, I could be 100% backwards in this analysis and the market might rally strongly in the face of what it should do because that is how the market rolls.  The number one rule in investing is the market is bigger than we are and it can bankrupt us no matter how sound our logic is.

As always, stay safe.

For those following the blogs over the weekend, there was a technical glitch that produces a post full of gibberish.  I apologize for that and it has since been corrected.  If you wish to read that post, it will follow this post on on the main page of the website.