Markets have been tentatively probing their way along, following Wednesday 2.5% route on fears of an Italian collapse and EU breakup.

Major indices remain above their key breakout levels — but just barely: The S&P500 at 1239 is a stone’s throw from its 1225 breakout level; The Dow Industrials at 11,893 are above its 11,625 breakout; and Nasdaq at 2625 is right on the cusp of its prior breakout 2620-ish.

The prior range was cleared, and now we are forming a thicket in this new range. I have no insight ads to how long this can go on for — a short while, or months.

One of the elements that could develop is that the fast part of the run up is over. Fears of a Euro contagion could spell the end for Michael Gayed’s Melt Up. Replacing that may be a period best described as a “Grind up.”

And I mean the term “Grind up” in both of its connotations. We can, after a brief period of consolidation, grind our way higher.

But my double entendre is intentional: By “Grind up,” those who are less than cautious may find themselves getting ground up by the markets. The volatility of a news driven market cycle is murderous on traders.

I do not like to dig in my heels, ever. My working assumption is that I will be wrong, frequently so, occasionally, spectacularly so. But until I see increasing risk factors, until some metric shows me a downside bias in markets, I am staying with my prior allocation (I raised my equity exposure to 80% from 50% some weeks back, by reducing cash).

My advice: Less is more. Stake out your position, determine your stops in advance, stay loose. Perhaps its time to extend your intended holding beyond the next 15 minutes –whether you are in cash or fixed income or equities. You are best served by avoiding the endless flip-flopping of the Risk On/Risk Off approach that seems to have become so dominant.

Category: Investing, Markets, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “Fears of Euro Contagion Might Lead to Grind Up”

  1. [...] Barry: How fears over the Euro contagion could lead to a grind up in US stocks.  (TBP) [...]

  2. Casual_Observer says:

    Barry, In a previous post, you asked for our market tells. My biggest one is this blog. I’ve made more and lost less in the three years I’ve been reading that I ever did before. My thanks to you.

  3. NervousRex says:

    So I’m nowhere near your level Barry, but I decided a few days ago to hold with my present thesis for periods of days to weeks, vs. hours to days.

    One of the ways to operate in a different domain than the algos and momos is to think on a slightly longer time scale than they do. I can imagine this sort of patience would be infuriating to a computer.

    NR

  4. kenny powers says:

    Seems to me that we are starting to see technical weakness across several timeframes. I am pure chart trader, so if the indices break above the recent swing highs, I’ll be long in a heartbeat.
    But the monthly chart, weekly chart and daily charts all look suspect to me.

    In the monthly timeframe, prices seem tobe breaking below the EMA 10, a decent primary trend indicator.

    In the weekly chart, the EMA 10 is below the EMA 40, implying the primary trend is down.

    And in the daily chart, well, the jury is still out, but unless we take out 1292, I think the risks of an abrupt break are quite high. The flipside is that initiating a short position (through buying puts, ideally) today on strength might be a decent punt. Don’t be stubborn, trade small, and go with the flow. And good luck!

  5. dead hobo says:

    Fear induced by headlines only creates dips. It takes real structural issues to crash.

    Lack of liquidity is the prime cause of extended dips and crashes. There is nothing in this economy that indicates liquidity is not available. For every dollar that hides in a mattress, a dollar is printed by a major central bank for temporary use. For the economically illiterate, this is NOT the same as printing money or a QE event. This is a primary and ordinary function of central banks. Without this liquidity, it would be 2008. With this liquidity, the invisible hand can continue to work.

    Both Italy and Greece have a lot of stored potential to, in a few years, emerge from this crisis not only repaired but as a shining example of prosperity. Both economies have institutionalized sloth as a cultural standard. Italy appears to make industrious behavior illegal in some cases. Both countries will change this status quo, I am quite sure. All wealth comes from labor or from the natural resources. Once this labor is activated, a great wave of prosperity will result …. eventually. There may even be a time where Italy and Greece disprove of German and/or French socialism and ask them to start hauling their own weight.

  6. dougc says:

    The “melt up” may be waiting to see if any results come out of the super committee. What I have read the rumors are positive . They are looking at accounting tricks and someday raising the retirement age. Will the market buy the lipsticked pig?

  7. Jim67545 says:

    Sen. Corker on CNBC just explained that the Republicans’ just-say-no approach is becoming unpopular but we all need to understand that this approach is a shrewd political trap by the White House that the Republicans have fallen victem to. Now we know.

  8. kenny powers says:

    I partly agree, dead hobo. but there is no shortage of real structural issues in the US, liquidity being ample notwithstanding. Look at the employment situation – there’s a real structural problem. I also happen to think that the european/us debt crises are long-term, structural issues. At least one pair of famous authors agree with me on this…

    There is also the possibility that liquidity being flush non-stop impedes the invisible hand somewhat, since it can distort asset prices, which may have implications for creative destruction, no?

    I agree that the potential in Greece and Italy e.g. is by definition great, since their economies are corrupt and inefficient. But thos things don’t change over a few months, it takes years. Like you, I am optimistic in the long term, but I fear things will get worse before they get better.

    Also, there are cyclical forces at play that cannot be written off, methinks: Look at what leading economic indicators (yes, the ECRI call) are doing. Paraphrasing Bernanke, liquidity is not a panacea.

  9. dead hobo says:

    1 more thing … oil and rbob have disconnected for some reason. At this time, rbob is not rising with oil. Hopefully, this will continue.

  10. Greg0658 says:

    my world view in this thread is: can labor over power capital ever again .. this all reveals the depth labor would need to “strike” to see reprieve .. pinching air is so easy .. and that my dears is the real issue at hand .. so wash rinse repeat . till

  11. AHodge says:

    well i have clearly been wrong
    waiting for the the last panic and official cave in europe
    “no” position with buy orders lower
    i have been happy so far missing this rally but might have to cave soon
    germany–merkel’s expert– unfortunately for me, has SOUNDED way too accommodating
    “cant let vicious circle start….have to protect all bank depositors” (wonder how broad that is)

    contrary to dougie above i dont think the Supercommittee will have a lovefest
    they will end with a food fight? but it just doesn’t matter–until 2013

    thats forever in these third world markets
    i note –sadly–im not trading anything but “policy”
    and i use that word in the loosest possible third world sense

    spending authority could also be bad this month
    but Rs a little wary n why fight on that when you can posture on the supercommittee?

  12. dead hobo says:

    AHodge Says:
    November 11th, 2011 at 9:38 am

    well i have clearly been wrong
    waiting for the the last panic and official cave in europe

    reply:
    ———–
    Had Greece and/or Italy dug in their heels and told the world to screw off, then this would have been a disaster. My comfort point was hit when the Greek bailout was agreed to, but prior to the decision for the Greek referendum. At that point, things because structural again. Then came Italy and it’s goofy former leader. Now both countries have new leaders and are moving forward on reforms. The crisis is over, until the next one appears. To me, things look hopeful overall. This is not to say there won’t be fear headlines. I’ve upped my ante to 40%, but am holding here. I’m testing some new theories. If they hold true, then I will get far more aggressive on my timing next year, but with smaller initial amounts than in the past. For my 2 cents, I still think it’s clear sailing until end of year, at least.

  13. AHodge says:

    meaning why fight on spending authority with actual consequences for nonpassage.
    when you can fight on supercommittee package with no near term actual failure consequences.
    just atmospherics and sentiment.
    and the worse those are
    the better for Rs.

  14. AHodge says:

    reply to reply
    they cant fix this with sovereign rescheduling alone
    check out mine from 2 days ago
    this is a bank problem with total unwrittten losses at least 2-3 times any likely sovereign writedowns
    officials assuming ALL sovereign losses would not solve it
    banks are looking for their big bailout in the guise of saving europe

    and if greece had told the world to f off it would have only been a disaster for greece
    handling a greek default only would have been piddle, a pimple from a creditors point of view
    we are talking bailouts a huge multiple of that–you are buying this BS its the sovereigns only argument
    the banks are promoting

  15. Irwin Fletcher says:

    Your steadiness is impressive. Yes, you have big brass ones.
    I tip my hat to that.

  16. nofoulsontheplayground says:

    a daily bullish flag on the Dow targets approximately 12,800 on the Dow.

    It’s close to breaking up, and cycles have an up bias over the next 2-weeks.

  17. ywsimw says:

    I stay with you BR, but I am very nervous…

  18. streeteye says:

    feels like it’s a range trade… when people are confident the crisis will get resolved it may be time to sell, when people are panicking it may be time to buy. Left brain says the authorities will come to their senses in time, right brain fears it will be too little too late and the mother of financial crises.

  19. gman says:

    sell some covered calls into the run up..vol is elevated..get paid to wait..or taken out higher..

  20. Gene-OK says:

    I guess the melt up (or bucking bronco grind up) is caused by Mr./Mrs. Investor knowing they will be bailed out with more European debt? Is the market happy because the Deutsche taxpayers will take the brunt of monetizing PIIGS debt?

    I honestly cannot tell what the reasoning is for market moves. (Not that I ever have.) I do have a tendency to stay in cash this late in the game. I wish I had the guts to follow your advice, but alas, I do not. I retire in six years, so the idea that “return of principle is more important than return on principle” has become emblazoned in what’s left of my brain. This is a really some nice insight from you.

  21. [...] The market is “grinding higher.”  (Big Picture) [...]

  22. rktbrkr says:

    U.S. stocks rallied, preventing a second straight weekly drop in benchmark indexes, as American consumer confidence topped estimates and Italy’s approval of debt-reduction plans eased concern about Europe’s debt crisis.

    1)Consumer confidence = lower prices at the gas pumps, oil heading back towards $100 will reverse this
    2) Italy approving debt reduction plans is a horse of a different color than Italy reduces debt.

  23. layman says:

    Just a bit off topic but, what are the chances that the “contagion” will move into France and Germany? Where does Europe stand then?

    Aside from technical analysis, there is a fundamental gap between the stock market and the current state of the economy. I am an accountant and deal with private entities ranging in $100K to $50M in revenues. I have noticed that almost 50% of these private companies have lost over 20 – 30% of their revenues over the last three years and it has not gotten any better. There is greater unemployment and demand is being reduced day by day, I would expect the stocks to show this trend.. but I just do not see it.