Bulls Slowly Getting On Board

Last week was a slight detour on the grind higher, as the Italy headlines are mostly forgotten ex-Europe.  It is easy to panic on scary Italian political headlines, as the fear of Italy leaving the EU can stir up asset managers to de-risk, despite the extremely low probabilities.  As long as PIIGS citizens fear losing money on their assets in the case of a EU exit, they will be against leaving.  In the UK, there was not that kind of fear because whether the UK is in the EU or not, they don't use the euro, effectively keeping them out of the EU financial system.  That is a huge difference between leaving a political union which they really weren't a participant in and a monetary union.  Anyway, Italy, Spain, or any of the other weaker EU economies still fear the consequences of being left out of the EU and thus their threats at the technocrats in Brussels are not taken seriously. 

Another worry from last week was Deutsche Bank, as its credit rating was downgraded and its stock continues to go lower.  I don't pretend to know the deep fundamentals of Deutsche Bank, but it seems like a profitability problem rather than a solvency or liquidity problem.  They have a huge amount of assets in Europe and if they all get marked down by huge amounts, sure they will be in trouble, but a 100 bps move higher in European peripheral sovereign yields is not going to do it.  It would take a deep recession, in which case, DB won't be the only bank going down.  The weakness in DB does show that Europe's economy is still mediocre, and that QE didn't really help the European banks that much.

The S&P keeps grinding higher, making new highs after last week's bad news shakeout.  We had Italy, DB, and tariffs.  This is the kind of resilient price action on bad news that gets bulls excited, but I would argue that the news wasn't as bad as it seemed.  It has been 2 months since the early April lows, and the SPX still can't get close to 2800.  The fuel coming from short covering and fund managers putting back on long positions after a scary bottom are long gone.  Now the US market has to rise on its own natural strength, as global markets are not going to help.  Neither is the Fed.  With Europe's economy looking like it has peaked, the US markets will have to deal with a dollar that is unlikely to weaken much in the near term.  A stronger dollar, 10 yr interest rates near 3.00%, and weak global growth is not going to get the job done for the bulls.  I expect a dovish Fed next week, because the dollar has strengthened, and that should be good enough for a last gasp stock rally in the US.  But after that, you have the black out period for corporate stock buybacks which will reduce demand for several weeks.  So I am looking at a potential short around late June, and anything between SPX 2750-2800 should be a good entry.  Until then, I will let the bulls try to grind this market higher.