Equity and commodity markets are taking a beating today, continuing from overnight weakness, as multiple instances of civil unrest in Europe are on the field indicators that not only is Draghi’s unlimited bond buying not immediately effective, but that this Europe sovereign debt situation may be getting worse. This is also objectively indicated by rising Spanish bond yields. The S&P 500 had a very weak finish to yesterday’s trade and weakness continues this morning as the market is approaching our key pivot of 1430.
The market is driven by fear and greed, and today is more dominated by fear of a Europe meltdown. Even with US economic numbers coming out much stronger than expected as of late, the S&P 500 is dominated today by fears of Europe unraveling uncontrollably. Oil futures, as we had eluded to in a recent morning call, have headed below a key level of $90 and will potentially reach our target of $88 sooner rather than later. The only major commodity that is up this morning is natural gas, which could be short-covering and position squaring into expiration. However, higher nuclear plant outages also could be contributing to this somewhat of a surprise natural gas rally.
We focus on E-mini Dow futures today. Obviously, we are seeing a short-term reversal in this market, with Dow futures unable to hold above a key pivot level of 13,500. Our next key pivot level is 13,200. The Dow futures are approaching, this morning, a multi-month trend line which could serve as initial support for this market. We think the positive US data will serve as a strong backstop to a further fall in the US equity markets, unless a major acute crisis event occurs in Europe. Our view is that as long as the Dow stays above 13,200, we see an upside target of 13,800. The market is in an interesting tug-of-war with on one side, the positive US data (especially housing numbers), and on the other side the Europe fear trade that is plaguing a more extended rally.