Market Reactions to ECB Meeting

• Posted by DynamicHedge
• on January 11th, 2012

The situation in Europe remains fragile.  Most market watchers feel that the Eurozone is in a recession or will enter a recession in 2012.  Tomorrow the ECB governing council meets and will make an interest rate announcement.  I care less about the action taken by the ECB than I do about the reaction of the markets.  The ECB may announce aggressive measures in addition to a rate cut which could be very bullish.  Or they could opt to simply hold rates steady.  Keeping rates unchanged is widely anticipated and is essentially neutral or slightly negative for the markets.  The tell is if the equity markets hold steady or trade higher.  Heck, the more times European leadership meets and the market doesn’t implode, the more bulletproof it becomes.  Any positive market tone on the back of this meeting will force me to reevaluate a longer-term bearish stance.

Nothing will have technically changed but I’d interpret this type of market resiliency as a sign that the market is ready to start working off the sentiment overhang and start slowly climbing the wall of worry again.  This doesn’t mean that we will go straight up from here (we’re already up 6 in a row, c’mon), but it is a sign that buying the next pullback is less likely to get you decapitated than it was a few months ago.  Of course, if the market uses whatever the ECB says as an excuse to sell off then the probability of us going back to Euro-Circus-Mode with a nice volatility spike increases dramatically.

Bottom line, we are at an inflection point.  A big, fat, long-term inflection point.  It can resolve either way, but it seems like there are too many cautious people out there to reward the downside in a meaningful way.  Despite traders being less bearish, they are far from bullish.  This is the wall of worry.  We’ll see how it plays out.

What are you all thinking out there?

blog comments powered by Disqus