Wall Street Gets Manip-EU-lated
“Man is the most intelligent of the animals – and the most silly.” –Diogenes
Just like avid theatergoers, investors stand up and cheer when the principal actors, or in this case, the EU leaders, give a strong performance. They applaud when Merkel, Sarkozy and company articulate, in rousing monologues or impassioned soliloquies, solutions to its mess of a sovereign debt crisis. Positive reviews, when given, are immediately seen in the form of surging markets, as opposed to soaring ticket sales.
A perfect example of the EU successfully playing to its audience was October 26, when euro-zone leaders emerged from the Brussels Summit to indicate an agreement was in place designed to bail out any of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) that otherwise might topple on their sword of default. The solution, they proclaimed, or at least a key aspect of it, was an agreement to utilize leverage to maximize the Financial Stability Facility’s (EFSF) 440 billion euro fund. The fund, intended to contain the crisis, was generally acknowledged to be of insufficient size unless such leverage was made available.
The market roared its approval, surging to its highest levels in three months, tearing through technical barriers and generally invoking a Bullish response from investors who have been awash in uncertainty and vertigo-inducing volatility.
But, as some Greek dramatist of an earlier era surely must have said: That was then, this is now. “Now” being defined as last week when both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) suffered the snap of a common four-week long winning streak.
The Dow ended the week off 2.0%. The SPX dug deeper, loosing 2.5% over the last five sessions. The Nasdaq Composite Index (COMP), meanwhile, faired only slightly better, dropping 1.9%.
In what has become a wild 100-day ride vacillating between deep drops and power surges, these numbers are not particularly shocking. Perhaps what is more of a surprise is the fact that it seems that Wall Street continues to react so strongly at each shrug and wink out of the EU.
This time, all it took was last Monday’s out-of-left-field announcement by Greece’s Prime Minister that a referendum would be called on the exact same thing that he already indicated his agreement on. This seemed to embody the mercurial nature of the PIIGS to investors, and the resultant uncertainty created a two-day, 570-point dive in the Dow.
Though a good part of the loss was made up as the week played out, primarily in response to the quick backtracking, fancy footwork and soothing reassurances of the Greek PM and other key EU member-state leaders, the damage had been done.
Investors may have simply decided that the euro-zone is simply too unruly a beast to be trusted.
Or have they?
If past habits hold true, we will continue to see this game of trust and betrayal occur as a continuing loop, not unlike the themes found in the ancient Greek tragedies. The result is a sideways market with deep dips and high pops, but a trendless market without clear resolution, at least for the short term.
If one were a cynic, it would be possible to view the reoccurring EU stick-and-carrot routine to be orchestrated, perhaps for the purpose of individuals or even entire governments, to benefit with the dips and rises of the current ultra-reactive market.
But, as we all know, that sort of thing only tends to occur in old plays.
What the Periscope Sees
The VIX (Chicago Board Options Exchange Market Volatility Index) ended the week around 30, which has emerged as a level of support. With the EU situation remaining so volatile, protecting your portfolio by harnessing volatility remains a prudent play. Consider purchasing VXX (S&P 500 VIX Short-Term Futures ETN) to protect yourself against more EU uncertainty and indecision, or, if you currently own the VXX, consider adding to your position for additional downside insurance.
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
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