The Dip Got Bought…. again, and Super Mario’s Kryptonite.. or.. is The ECB a Real Central Bank?

by Rasool Cunningham
Futures Trading Editor
Philadelphia, PA (DYDD)

 

The dip got bought again and the Dow wound up pulling another higher close out of it’s hat. Housing starts and building permits both surprised to the upside today giving the dip buyers the backup they needed to buy everything the bears threw at them today. I’ve been saying this for some time, but with the wind to their backs, the bulls have no fear in this market, so it seems, but there’s more work to be done, as the daily chart of the Dow 30 tells us below.

 

 

New highs are needed to get all the bad thoughts out of the minds of the biggest market participants. With budget gridlock in Washington D.C., and Cyprus worries across the pond, there’s more work indeed for the market to do. Because even though the dip was bought, the doji candle the Dow put in today smacks of indecision. As mentioned yesterday I think the spell is broken. I expect to hear more and more about the effects of the sequester cuts, as well as more bad news out of Europe, like Cyprus trying to leave the Euro, and a continuation of the bank run in that country.

The contagion question will be in the back of minds (or the front of the financial websites and blogs) of market participants also. As it should be. The mere suggestion of a depositor hair cut is Super Mario Kryptonite. Whether he agreed with it or not, it’s in the minds of depositors all over Europe and there’s not a printing press in the world that can handle real capital flight. This is why the announcement that the ECB would be providing liquidity to Cyprus did nothing but send the Euro lower (but couldn’t it be because the market expects printing to be the way they provide that liquidity?) either way, I think the the market is heading lower. The people who bought this dip today will have to vomit those shares out tomorrow. Maybe not vomit them out, if they’re smart. Because the Fed just may give them a chance to get out with a gain.

Maybe the Fed will give an upbeat enough outlook on the economy that makes markets go higher. But if the spell truly is broken, like I think it is, look for the market to find something in the FOMC minutes to go down about. If the Fed is looking down the road, the way they should be, they won’t say anything too optimistic. If they’re worried about the markets now, and thinking short term; then they may try to juice things up a bit.

But with all this talk of a bond bubble bursting, the Fed needs this market turmoil so the market can help them keep a floor under bonds. This way they don’t have to do all the heavy lifting by themselves. Europe and the ECB on the other hand, have real problems. If one country leaves the Euro system, they’ll all contemplate it, and that’s no good for the Euro. There are already calls for Cyprus to “default, devalue, and decouple” from the European single currency.

Do I think that will happen? No, but I’m not one of the worlds biggest money mangers like PIMCO, who is now saying they’re cutting their exposure to Europe. Just the perception that the European crisis isn’t over, or even close to being over is enough to make big money run for the borders. Most people think of this problem as a small thing that the Europeans will be able sweep under the rug like they’ve done in the past. The problem is that the dirt under the rug is getting too big to ignore; markets are starting to trip over it again. You have to figure Greece, Portugal, Italy, and even Spain are already under there to some extent, is there room for one more?

The only “easy” way out of this is for the ECB and Super Mario to be a real Central bank and be the lender of last resort. If a central bank isn’t the lender of last resort, can it really be called a central bank? The ECB needs to come to the rescue again and print some money and recapitalize Cyprus banks. But as we know, they’re in no rush to touch Cyprus, hence the title of this post. This is where things start to really get interesting in the saga that is the European Union.

I think the bank run in Cyprus is on folks, so, when the banks open, if the banks open, on Thursday, everybody that has money in them will take it out. This is where we find out if the ECB is a real central bank or a regular bank masquerading as one. Because a real central bank would meet people looking to withdraw their money at the front door of the bank with both hands full of cash. A real central bank wouldn’t let lines form at ATM machines, or let bank holidays get extended. Oh, yes traders, it’s about to get pretty interesting indeed, because we’re going to find out if Mario is really super. This Cyprus-nite is either going to kill him, the ECB, and the EU, or the ECB is going to finally “act”not talk, but “act” like a real central bank.

Thanks for reading! And check out my new book: 21 things every trader should know.

 

 

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