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Euro Holds Key For Stock Market Rally

Stock-Markets / Stock Markets 2011 Dec 28, 2011 - 12:43 PM GMT

By: Chris_Ciovacco

Stock-Markets

Best Financial Markets Analysis ArticleThe best way to monitor the sustainability of the current push higher in stocks (SPY) is to keep an eye on the euro and U.S. dollar. The correlation between stocks and the euro has been strong in recent months. In the current environment, when the euro strengthens, stocks tend to come along for the ride.


On Wednesday morning, the euro made a new low (see below). If the euro fails to recapture 129.87 in the coming days, it may signal another round of weakness for stocks and commodities.

CCM Short Takes

The weekly chart of the euro is telling us to keep an open mind about the possibility of a snap back in the euro. The euro has clearly made a lower low (see downward sloping red line below), but the technical indicators (ULT and MACD histogram) have made higher lows (see green lines top and bottom). The divergences between price and the indicators may be indicative of a weakening desire to sell the euro (emphasis on may).

CCM Short Takes

Since ETFs are a little easier for the average investor to follow, we will focus on the euro and U.S. dollar ETFs below. If the euro ETF (FXE) fails to recapture 129.34 in the coming days and weeks, it will lean bearish for stocks and commodities.

CCM Short Takes

Looking at ETF volume, we see above average interest in the U.S. dollar. Since volumes are light this week, we will use the S&P 500 ETF (SPY) as the baseline. SPY has traded 46 million shares as of 11:30 a.m. ET on Wednesday, or roughly 19% of a typical full trading day. UUP has traded 77% of a typical day’s volume; FXE 45%.

As outlined on December 18, we do not believe the European Central Bank’s (ECB) three-year loan facility represents a long-term solution to unsustainable levels of debt in Europe. With ten-year Italian yields still hovering around 7%, the bond market is skeptical of the ECB’s “back-door bazooka” as well. Since the December 19 low, stocks have turned a blind eye toward Italian yields. If the U.S. dollar ETF (UUP) can retake, and hold above, 22.62, it would add to our concerns about the sustainability of the recent push higher in stocks. Conversely, if UUP drops significantly below 22.62, it will increase the odds of stocks pushing higher over the next few weeks.

CCM Short Takes

Ciovacco Capital Management

    Copyright (C) 2011 Ciovacco Capital Management, LLC All Rights Reserved.

    Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

    Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. As a registered investment advisor, CCM helps individual investors, large & small; achieve improved investment results via independent research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions. When looking at money managers in Atlanta, take a hard look at CCM.

    All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

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