Want to be a consummate stock picker and investor? Forget all you have learned in business school, from fundamental or technical analysis, or from years of trading: the only thing that matters is the position of the sun: if it is rising, sell. If it is setting, buy. Rinse. Repeat. Bank of America explains it just slightly more scientifically.
For the fifth consecutive day US equities sold off in the morning only to rally in the afternoon as European markets closed. That to us symbolizes the tug o’ war between negative developments in the European sovereign crisis and positive developments in the US economy. Today our European economists downgraded their outlook on European growth to now call for a small contraction in Euro Area GDP next year. However, this is not a major concern to us in terms of the outlook for US corporate credit, as the direct economic linkage between the two economies is fairly weak. Instead our concern with Europe is the possibility that the sovereign crisis leads to further volatility in financial markets over the next couple of months, as – through more persistent hits to consumer and business confidence – that could be the external shock that pushes the US economy into recession. However, it is also striking how the market has shown resilience to the recent surge in Italian interest rates now approaching 6.8% on the 10-year. That suggests the market is somewhat comfortable with the ability of Europe to deal with Italy and work through its crisis – and perhaps reassured by the extra cushion on the US side from an economy that appears to have momentum into year-end.
And since we are 5 minutes away from the Europe close as of this posting, we expect a massive rip as the vacuum tubes switch from sell to buy mode oblivious of reality and everything else.