It is always amsuing to listen to market narratives, however goal seeked they may be, when presented by market veterans such as Art Cashin, who in this case deconstructs the violent clash between reality and post-summit hype as represented by yesterday's amusing market action.
From UBS Financial Services:
Reality Overwhelms Post-Summit Hope - After a weekend of analysis, economists and traders realized that their first assessment of the European Summit had been correct - little had actually been achieved.
As dawn hit New York, traders saw markets in Europe under real pressure. Most had given back all of Friday’s gains. Both Moody’s and S&P said they intended to review the banks and the sovereigns. Both suggested rather strongly that the Summit had achieved little - if anything.
U.S. stocks took the hint and opened down 135 points. The bulls tried to quickly circle the wagons but couldn’t get organized. Prices continued to move lower into late morning. Then the third shoe dropped.
Around 11:30, Fitch ratings issued a comment on the Summit. It began like this:
Fitch Ratings-London-12 December 2011: Fitch Ratings says after the latest EU crisis meeting it is clear that politicians are responding to the eurozone sovereign debt crisis through incremental improvements. It seems that a "comprehensive solution" to the current crisis is not on offer.
This Summit demonstrated strong political support for the euro, and that its members are putting in place the institutional and policy framework for a more viable eurozone and ultimately greater fiscal union. But taking the gradualist approach imposes additional economic and financial costs compared with an immediate comprehensive solution. It means the crisis will continue at varying levels of intensity throughout 2012 and probably beyond, until the region is able to sustain broad economic recovery.
In the short term we predict a significant economic downturn across the region. The eurozone faces intense market pressure, which is triggering loss of business and consumer confidence, and weak industrial activity and retail sales. Our forecast of 0.4% eurozone GDP growth next year and 1.2% in 2013 would be significantly higher if there was a comprehensive solution to the crisis. The lack of a comprehensive solution has increased short-term pressure on eurozone sovereign credit profiles and ratings.
That diplomatically stated” thumbs down” for the Summit seemed to spook the few buyers who were left. Prices hit an air pocket and moved sharply lower over the next 15 minutes. The Dow Jones Industrials hit their 200 day moving average (circa 11943) and seemed to hold.
The same thing happened in the S&P but in this case it was the 50 DMA (circa 1222). The selling actually dried up at 1227 (see yesterday’s napkins).
While they held, there was no reversal rally. Instead they churned choppily sideways into the final hour. Around noon, several pundits tried to attribute the selloff to the downbeat Intel report pre-opening. That prompted me to shoot out the following email to some trading friends.
This is still 90% Europe. Exacerbated by Fitch comments. Downbeat Intel adds to last weeks DuPont.
Best for bulls if they can manage to close above Thursday lows.
Run rate looks for under 800 million final so far.
Around 1:15,a buzz swept the floor as the Dow ran a single headline that said something like: Israel to Iran: You must choose between a bomb and your survival. Strangely, the market didn’t flinch and quickly the headline became an afterthought.
Around 3:15, after testing the day’s lows for the fifth time, stocks began to rally. Actually, they began to float up. Traders suspected the move may have had a large dollop of short covering. Thinking was, that with European markets having closed right on the lows, some upbeat comments would be due from European leadership.
Having been down nearly 245 points at the lows, they closed off 163 on 758 million shares. There was also evidence of program trading since the Dow and Nasdaq each closed down exactly 1.3%. The S&P was close at 1.5%.