Stocks were “supposed” to rally on Friday ahead of the long weekend. While they did put in a good performance, they still ended in the red. That adds further weight on the short-term negativity of some of our models when stocks don’t behave as the odds say they should.
This morning we woke up to more troubles in Italy. Anyone surprised by this hasn’t been paying attention. In my year-end report to clients as well as in my Fearless Forecast, I listed Italian and Spanish banks as things that will keep me up at night in 2018. Too big to fail, too big to save. I think this remains on the tip of the iceberg. Investors should worry a whole lot more about European banks than anything Trump is going to tweet and saber rattle.
Although I do not think this is anything like the financial crisis and 2007-2009, I do think these banks may be a canary in the coal mine. Remember sub prime loans in early 2007? How about those two Bear Stearns mortgage hedge funds that blew up in July 2007?
Early in the year, you were hard pressed to find many pundits who didn’t think Europe offered better risk/reward than the U.S. And most believed that European banks had much more upside than U.S. banks. While I couldn’t argue with their fundamental conclusions, I also couldn’t join the overwhelming majority in these trades.
Anyway, stocks look to open almost one percent lower, taking their cue from European markets. I wouldn’t read so much into it until we get past the first hour. We have upside and downside reversals still in play. Let’s see if which gets closed above or below first. The NASDAQ 100 and technology are poised to resume leadership as I mentioned last week.
Semis and internet look like they want to break out higher. The same with transports and discretionary. We will have to see about the banks. Energy stocks are oversold in the short-term. They are “supposed” to find a low this week. Junk bonds still stink.
Bonds continue to quietly rally which means lower rates. What happened to all of the bond armageddon pundits who drew all of those absolute and fancy lines in the sand?!?!
