U.S. stocks surged Tuesday when reports first surfaced that Germany was considering some sort of aid toward Greece. The report reduced credit risk fears globally and caused the Euro to surge. U.S stocks that stand to benefit the most from the resumption of global growth and a lower dollar led the effort. Caterpillar , the world’s largest maker of construction equipment, added five percent to lead the Dow Average .
Beyond the fact that the U.S. stock market — off 7 percent from its 2010 high — is banking on the rescue of a country the size of Alabama, traders have their doubts this Greek bailout is the godsend we need.
The extreme rise in the Euro and subsequent fall in the dollar that is continuing today could simply be a function of a classic ‘short squeeze’, where a massive amount of investors are on one side of the trade and flee toward the exits on the first rumor that would work against this position.
The latest figures from exchanges showed that hedge funds and other investors heading into this week were the most ‘short’ the Euro that they have ever been.
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“The market has been caught leaning after the downside momentum slowed,” according to a report from Brown Brothers Harriman out of Asia last night. “The risk is the market is setting itself up for disappointment if it is buying the Euro on ideas of an EU rescue,” adding that it may be too soon in the process for the European Union to provide support to Greece before the country has even begun its own so-called austerity programs.
Dennis Gartman, well-schooled in global politics, adds to the doubts, citing the “no-bailout” clause in the EU framework. The only way out of this framework is a clause that “will allow other European states to come to the fiscal aid of another state if the latter is suffering fiscal difficulties caused by ‘exceptional circumstances beyond its control,’” wrote Gartman, in his Gartman Letter this morning to clients. The Germans believe exceptional circumstances “are events such as earthquakes or other natural disaster that are truly beyond the control of the government.” Gartman believes U.S. bulls banking on this resolution from the Mediterranean are in for more than just a correction, but perhaps a new bear market in U.S. stocks.
Those bulls are hoping for confirmation of a Greece aid package from an EU summit Thursday, where Europe’s top central banker Jean-Claude Trichet is attending.
But no instantaneous bailout package is likely to be announced at this summit, according to Brown Brothers. Instead some sort of framework for assistance, after Greece takes more hard steps to put its own fiscal house in order, is the more likely scenario.
This rebound in the S&P 500 this week is “mostly complete,” said Todd Gordon, Senior Technical Strategist for FOREX.com, citing the technical ‘short squeeze’ in the Euro. He’s looking to go short the S&P 500 again once it hits the 1080 mark.
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