Before I lay out the pluses and minuses of the current market I want to acknowledge the elephant in the room. The Italian 10 year bond yield is soaring this morning and is above 6.00%, despite the passing of austerity measures on Friday. It is difficult to imagine a good rally developing without some sort of intervention by the EU. I believe the largest influence on trading this week will be Europe.
My sense is that European markets want to rally. European stocks seem to be going down begrudgingly and seem sold out. However, with sovereign spreads blowing out it is highly unlikely that they will be able to muster much of a rally. If the EU does something to help the crisis I believe we could see an explosive rally in European shares that would likely drag us along for the ride.
Turning back to our markets, the biggest negatives this week are that we are now in a period of negative seasonality and that the market will not be oversold until the end of the day on Thursday. Bullish sentiment has backed off in the past week but not as much as one would expect given the steep drop.
The good news is that we saw some of the heaviest put buying of the year late last week. Typically that leads to better performance. We saw some cash M&A activity late last week as well. By the end of the week we will be oversold and heading into positive seasonality.