European sovereign spreads are moving the wrong way once again this morning. Spain's budget deficit is spinning out of control. Even if the EU or ECB steps in to help Spain they will likely want to wrestle out some reforms first. This is unlikely to go away quickly and will probably get worse before it gets better.
We have seen two Summers in a row when market participants were fooled out of their positions due to European sovereign fears only to find themselves chasing stocks at higher prices. While I am skeptical that we will see the exact same thing play out I do believe that these sovereign fears will be enough to wipe out the excess fluff in the market. This should lead to at least a meaty correction at some point. The only question is when.
Most sentiment indicators are pointing to market participants being long and there being few bears. This sudden flare up has caught most investors with their pants down, myself included to some extent. I have been expecting this correction but did not think it would occur during the three seasonally strongest weeks of the year. Normally, I would have rolled up the strikes on my SPY puts when we rallied late last week and early this week. But I decided to wait.