European Debt vs. U.S. Economy
Daily Profit



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European debt issues are once again weighing on the stock market. Where have I heard that before? Oh yeah, it was last year about this time that Dubai defaulted and Greece's debt problems came to light. Unfortunately, these debt problems are not one and done.

Ireland has been bailed out, to the tune of $113 billion. Now, investors are wondering if Spain might be a problem, too. The chief economist for the Bank of Spain says the Spanish banking system is fundamentally sound, but what else would he say?

Investors are speculating that Spanish banks need to refinance $111 billion in debt. So they are driving the yield higher on Spanish bonds. Spanish banks have responded by selling a lot less bonds. Bloomberg reports these banks have sold 300 million euro this month, compared to 2.37 billion euro in the same period last year.

Maybe Spain needs help, maybe it doesn't. Investors typically adopt a "sell first, ask questions later" approach to these situations.

U.S. banks aren't overly exposed to Europe. The data is a bit old, but in June, U.S. banks had $68 billion in Irish debt. Germany and England had $139 billion and $148 billion, respectively. (Don't miss the irony that, even though Germany is taking the hardest line on bailouts, it stands to benefit significantly.)

No, the issue for the U.S. is mainly currency related, with a smattering of slower growth in EU thrown in.

The euro is weakening, and so the U.S. dollar is getting stronger. That's undermining the benefits that QE2 was supposed to lavish upon us.

Daily Profit readers may recall that we discussed what often happens with one-sided trades. When 99% of investors think an asset can only move lower, that asset has a tendency to rally. We've just seen this happen with the dollar. It was a virtual consensus that the dollar would get washed out.

Instead it has rallied, as we can see on the USD chart...

Please note, I have left the 50-day and 200-day moving averages on the chart for some perspective. We should expect to see the 200-day moving average, at $81.74, act as resistance for the dollar's advance.

Despite the headline problems in Europe, the fundamental story for the U.S. economy has been improving. Retail sales were strong over the weekend, consumer spending has been trending higher, new unemployment claims have been steadily dropping, and manufacturing data has surprised to the upside.

Consumer confidence is rising, both in the surveys, and more importantly, at the cash register.

So, I'm bullish. What can I say? I think the European debt problem is something of a distraction at this point. The EU isn't going to collapse, even though there remain important issues that must be resolved.

The S&P 500 has been testing support at 1,175 for a couple days now. But I'm going to let my Wyatt Investment Research colleague, Jason Cimpl, give you the technical picture. From this morning's pre-market advisory:

"...the bulls once again protected 1175. The bears cannot take down one established support level. It is almost pathetic how after a few weeks of selling, the bears can have accomplished zilch. (other than manufacture fear)

I outlined many reasons yesterday for why the market should go lower, but at the end of the day people need to sell to take the market down.

I believe the decline over the past two weeks is merely a minor pause in a bullish trend and all indices will go higher again..."

As you probably know, Jason is the trading strategist for TradeMaster Daily Stock Alerts. Jason keeps his readers on the right side of the market with uncanny consistency.

Right now, he's got 4 upside positions open, and 3 are showing gains. The one loser, a play on the banks, is down a measly 3%.

(Incidentally, you can give TradeMaster Daily Stock Alerts a trial run for 30 days, details HERE.)

If there's a rally brewing, and I agree with Jason that there is, the banks should lead in the early stages. And so will retail. I've been banging the drum for retail since November 8, and sales are surprising to the upside.

Please feel free to write me with your questions and comments. I'll probably print them in Daily Profit:

Posted 11-30-2010 3:10 PM by Ian Wyatt