Thursday, November 10, 2011


Italy was obviously the catalyst for today's vicious selling, but you have to wonder why it suddenly became such a problem overnight. Italian bond yields inched higher, but there really wasn't any new or dramatic news. The market just decided that it was going to focus on the negatives today, and when we didn't bounce back after the weak open, the selling accelerated as folks decided they better step aside just in case.

The poor action today raises the big question of whether the sharp rally off the October low is finally coming to an end or if this is just a healthy bout of profit-taking that will set us up for a well-anticipated year-end rally.

The bearish argument here is obvious. Europe is a mess, and the problems in Italy are just the tip of the iceberg. As the extent of the problems becomes known and the market comes to understand that there are few solutions, the selling pressure will increase, and a downtrend will gain momentum.

That indeed may come to pass, but so far we are still holding above key technical levels at 1220 and, more importantly, the 1200 level of the S&P 500. If the downturn gains sufficient momentum to take out those levels, it will change the complexion of the action drastically, but I'm not inclined to anticipate that development.

We have often and consistently seen "Europe is saved" rallies. I expect that this dynamic will continue, even though so few folks believe that any real solution is close to being reached.