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Sector Detector: Confused Investors Are Saying, 'It’s All Greek To Me'

 May 17, 2012 01:58 PM

(By Scott Martindale) When something is confusing or incomprehensible, a person might say, "It's all Greek to me." Well, that's exactly what investors have been saying for the past several days—in the market's inimitable way. Despite promising economic and corporate news in the U.S., the headline risk from Europe has been just too much to bear. It is keeping the bulls at bay, and front and center for an encore performance is Greece.

I guess the Greeks couldn't stand losing their global limelight to Spain and Italy. Greece is like that pesky cousin who always stops by unannounced to bum a free meal and "borrow" a few bucks (and light up a cigarette in your living room before heading out).

They have not been able to put together a political coalition to run the government, so the likelihood of them having to drop out of the euro is steadily rising. Now we must await another round of elections slated for June 17, while bond rates in Spain and Italy rise. If Greece refuses to make mandated spending cuts after the new elections, which is likely given that anti-austerity candidates are likely to gain even more support the next time around, they may lose their bailout and get kicked out of the euro club. Many experts think such an occurrence would be devastating to the EU and UK.

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The resulting weakness in the euro vs. the U.S. dollar has been a negative for U.S. equities and good for bonds. Looking at the U.S. sector iShares this week, Financial (IYF) and Materials (IYM) have been the weaklings, while defensive sectors Healthcare (IYH) and Consumer Goods (IYK) have held up pretty well. The PowerShares US Dollar Fund (UUP) and iShares Barclays 20-Year Treasury Fund (TLT) are both up this week.

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But this correction seems like a developing buying opportunity to me. The only question in my mind is how much pain investors will have to endure before the market rebounds.

Bonds have become wildly overvalued relative to stocks. The U.S. 10-year Treasury yield is near its all-time low as money flees Europe in favor of the relative safety of the U.S. So, there is no shortage of liquidity in this country…and the Fed has pledged to make sure it stays that way.

Despite some extremely worrisome developments last week, including European elections, Cisco's (CSCO) weak report, and JP Morgan's (JPM) revelation, the market has not cratered and bears have been remarkably tame. Looking ahead, corporate earnings have been strong overall, and companies are carrying strong balance sheets with plenty of cash.

The highly anticipated IPO for Facebook (FB) is nigh, and investors are jazzed. It is expected to start public trading on Friday. Notably, the firm is only paying its numerous underwriters a 1.1% commission, given that there is little in the way of press and exposure the deal needs. There have been several other Internet IPOs recently, including LinkedIn (LNKD), Groupon (GRPN), and Zynga (ZNGA), so the market's appetite is already whetted for social media companies. Demand for FB has been so strong that the company raised the bottom end of its share price range from $28 to $31.

The biggest chink in the bull's armor is newly elevated fear of a European meltdown. For now, Germany's brisk economic growth has balanced the erosion in the at-risk nations to keep the eurozone out of a net recession, but still, seven of the 17 eurozone nations are in an official recession.

SPY closed Wednesday at 132.83. Last week, it lost the strong support it had been enjoying at the convergence of its 50-day simple moving average and the uptrend line. This week it has lost support at the convergence of its 100-day simple moving average and the line of prior support just below 135. Volume is still elevated during this period of weakness. RSI, MACD, and Slow Stochastic are now deeply oversold. There is little in the way of support between here and the 200-day SMA near 128, so an immediate bounce is needed. Given the weak technical conditions, any sign of promising news from across the pond could result in a very strong relief rally.

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