Germany May Throw Markets Bearish Curve

By: Chris Ciovacco | Tue, Sep 25, 2012
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According to the Wall Street Journal (WSJ), Germany wants to delay Spain's formal request for aid. If Spain continues to drag its feet, stocks, commodities, and precious metals could slip into correction mode. Below are the potentially bearish points from the September 24 story:

Progress on two of the euro zone's most pressing concerns--containing the crises in Greece and Spain--faces holdups up in Germany, where Chancellor Angela Merkel is reluctant to ask parliament to vote on measures that are likely to raise fierce opposition from within her own coalition.

Spain's decision on whether to seek bond-market intervention by the European Central Bank, as financial markets are hoping, is also in limbo. That is partly because Germany has signaled that it doesn't want Spain to make the move.

Ms. Merkel's aides are searching for a way to close the Greek shortfall without asking German lawmakers for more money. Any request for fresh bailouts would likely spur bruising, and politically damaging, fight in Germany's lower house of parliament, the Bundestag.

On September 23, we outlined the five fundamental drivers that could spark a stock market correction. The first concern listed was "Spain may choose to delay a formal request for aid." The news that Germany may be encouraging the delay only heightens our concern on this issue.

Even under a correction scenario, an S&P 500 push toward the 1,487 to 1,550 range may be needed to clear the post-QE euphoria. Silver (SLV) was the best performing major ETF during QE2. On Monday, SLV experienced a bearish MACD cross, which increases the odds of a correction. Trading For A Living by Dr. Alexander Elder provides some insight on this indicator:

MACD crossovers identify shifts in the balance of power between the bulls and the bears. When the black MACD line drops below the red MACD line, it shows that the bears dominate the market, and it is better to trade from the short side. When the black line moves below the red line, it gives a sell signal (see red arrow below).

MACD signals on daily charts are not nearly as important as those that appear on weekly or monthly charts, but the bearish cross on silver's chart below does show QE-friendly assets are losing upside momentum. We took profits in SLV last week, but are not advocating shorting silver. Another push higher is possible, but any subsequent gains in SLV may be hard to sustain unless MACD improves.

SLV (iShares Silver Trust) NYSE

Williams %R is another valuable tool to track momentum. On the daily chart of the S&P 500 below, the indicator is showing a discernible decline in bullish conviction. A move back above -20 would alleviate some of our short-term concerns.

$SPX (S&P 500 Large Cap Index) INDX

Looking around the globe, numerous ETFs have waning upside momentum, which increases the odds of a more substantial correction.

EFA (iShares MSCI EAFE Index Fund) NYSE

On Monday we learned an index of business confidence in Germany, the biggest economy in Europe, fell for a fifth straight month. The FEZ ETF below dropped 0.70%.


According to Reuters, about 2,000 Chinese employees of an iPhone assembly company fought into the early hours of Monday, forcing the huge electronics plant where they work to be shut down. EEM was able to stay nearly flat on Monday (see below).

EEM (iShares MSCI Emerging Markets) NYSE

In a recent video, we outlined numerous ways to monitor the battle between risk-on and risk-off, including tracking the performance of stocks (SPY) relative to bonds (TLT). For the balance of the week, the primary driver of risk assets will be Spain. If Spain (EWP) outlines new measures as expected on Thursday and simultaneously requests help from the European Central Bank, stocks and QE-friendly ETFs could shoot higher again. But if Spain disappoints on any front this week, tired stocks and commodities could experience a "give back" period similar to what occurred in November 2010 (see two charts below).

$SPX (S&P 500 Large Cap Index) INDX

SLV (iShares Silver Trust) NYSE

We are currently maintaining a relatively high cash position. If the charts improve and the news from Europe allows, we are happy to jump back on the reflation train. Our shopping list includes QE2 winners such as silver, oil stocks (XOP), and mining companies (XME).



Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at

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