Futures are pointing higher as a result of sharp gains in Asia and Europe as investors await results of the Italian election and the question of the sequester as well. The sequester is $110 billion in cuts per year for ten years. About $25 billion of that, however, is from annual interest savings from the lower deficit that allegedly results, thus the real impact is more like $85 billion per year. The reduction in proposed outlays is about $44 billion. Given the $3.6 trillion annual Federal budget, a $44 billion reduction in outlays only represents a 1.25% savings. The Fed prints that much every two weeks. Further, $44 billion is just a quarter of one percent of the $16T annual GDP. Thus, any market nervousness is perhaps due to each side in Washington blaming the other, making things sound as bad as possible if the other side doesn't give in. Meanwhile, quantitative easing should continue if full measure, helping to prop markets, notwithstanding continued political issues here and abroad and debt concerns over in Europe. Over in Japan, Haruhiko Kuroda could be the next governor of the Bank of Japan. Kikuo Iwata will be one of his two deputy governors, and both Iwata and Kuroda are viewed as pro-stimulus, thus further contributing to today's higher futures.
After a relatively hard two day sell off on Wednesday and Thursday of last week, the major market indices bounced on lower volume. Today's pre-open action in the futures continues that bounce, and it remains to be seen how well this reaction rally and bounce holds up. The ability of the market to sustain a bounce will likely depend on a number of damaged market leading stocks recovering and repairing technical damage within their chart patterns. There are some leaders that have held up well, however, such as LinkedIn (LNKD) and Google (GOOG), for example. Of course, while LNKD and GOOG managed to withstand last week's selling pressure, other leading stocks have not fared as well, so it is best to keep stops tight in this environment. Stocks often take the elevator down and the escalator up, meaning that downside breaks can occur much faster than it takes to achieve the same amount of price movement to the upside.
Friday's economic news somewhat reversed the negative news from earlier in the week. After some Federal Reserve members two days earlier spoke of slowing or ending quantitative easing ahead of clear signs the economy was improving, as shown in the minutes, St. Louis Federal Reserve Bank President James Bullard, a voting member on the Fed,said the Fed's policy will "stay easy for a long time." Meanwhile, in Germany, the Ifo business climate index for February showed its sharpest rise since July 2010, according to Reuters. This came a day after a bad reading on the Markit Flash Eurozone Services gauge. Bernanke will testify before the Senate Committee on Tuesday and Wednesday which can move markets.
While much is being made of the "black cross" forming in the precious metals, the fact is that such an occurence does not lead to longer-term tops in silver and gold. Generally, and generally the metals will move higher six months after such a "black cross" so we would not make too much of this. As well, the metals have bounced hard on Friday and are up again this morning as they found ready support near their roughly 17-month lows.
The bounce over the past two days shows why the short side of the market is premature at this time, and why we have refrained from sending out any Short-Sale Set-Up reports. As the situation develops, however, and should the market fail to sustain what so far looks to be at least a two-day bounce, members should watch for real-time reports as we believe the short side becomes more actionable. In the meantime, the Market Direction Model remains on a buy signal, pending further evidence.