Italy: A Page Out of Modern History

How quickly we forget about all those EU headlines that moved markets in 2010-2012(PIIGS), 2015(Greece), and even as recently as 2017(French elections).  It is Italy this time.  And it looks like Italy wants their cake and eat it too.  They want to increase government spending and thus their budget deficit, which would break EU budget laws, while remaining in the Euro.  I am sure Draghi wouldn't mind, but Germany would be furious if the EU gave a deal to placate the Italians.  Probably much ado about nothing, as Italy will be neutered by the Brussels technocrats.  But this is another sign that populist governments are becoming more common and want to blow up the budget to give out freebies and pump pump pump.

If you eventually get a bunch of populist government policies around the world blowing up huge deficits, you will end up with countries dependent on ZIRP and QE, because they can't deal with the financial turbulence that comes from high rates that would naturally occur with rising government bond issuance.  Instead, they would have to placate the financial markets by lowering rates (US), or by doing QE (Europe/Japan).

Back to the current market.  I get a sense that the current bullishness is a mile wide and an inch thick.  There isn't strong conviction by bulls here, but they are still beholden to the "great" fundamentals, so their natural tendency is to stay bullish, but are easily scared by headlines, like the ones we'll get today about Italy.  This is not like your past dip buyer's market.  It is a short the rally market.  In 2017, there were probably just as many bulls, but they had higher conviction and were very sticky to stay bullish because of the lack of volatility.  This year, you have shaken the conviction out of many of the bulls and put in a seed of doubt about a continued rally with the increased choppiness.  They remain bulls, but with less conviction.  The best environment to trade on the short side is when you have a lot of low conviction bulls who get easily scared and sell quickly.

It is looking like we are forming an intermediate top this month, and while it could be extended out a few weeks into June, I see lots of room for this market to go lower in July and August as a slowing global economy with tighter monetary conditions does it work.  SPX 2740 resistance held like a rock, and even if we do break that level later this month or in June, I expect only a minor break higher, perhaps up to as high as 2760, before forming a top and plunging back down below 2600.