A Central Bank War Just Started And It's Good For Stocks

A Central Bank War Just Started and Its Good For Stocks

ECB Effects

The move in the euro was huge, falling over 200 pips, huge. But the most important piece here is that the euro broke essential support at 1.13.

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euro

Draghi was very dovish today with his outlook, so much so that German Bunds fell to around 6 bps from 13 bps. Our 10-year fell to 2.63%. A break below 2.62% sends the 10-year back to its December lows.

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10-year

Over time investors should come to realize that rates will remain low and that the Fed will need to stay on hold to avoid having the dollar strengthen too much. Should the dollar rise, it will kill off whatever inflationary forces there are while hurting our multinational companies. The result may be a Fed that needs to cut rates by late 2019 to keep the dollar in line versus the euro and avoid this scenario.

But this should be good for stocks as investors move out on the risk curve, and low interest rate foster multiple expansion for stocks.

S&P 500 (SPY)

Stocks did end up falling some, with the S&P 500 dropping by roughly 80 basis point to 2,748. Certainly not the end of days, but a decline worth noting. The S&P 500 did manage to close at a pretty substantial level of support around 2,750. Remember this was one of the reasons I had some hesitation a couple of weeks backs about the market, and a level I tried to keep in the back of everyone’s mind. Now that gap is filled, what next?

From my point of view, it is now crucial for the S&P 500 to hold support around this 2,735 level. A drop below that support zone gets things moving to the downside with the potential for a drop below 2,700.

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S&P 500, spx

Russell 2000 (IWM)

The Russell’s decline was the most noticeable because it did fall below that level of support I had noted last night at 1,535. The Russell’s drop has me much more concerned than the S&P 500 at this point. The chart now suggestions that the index could drop by another 2% to around 1,492. There is a minor support level about at 1,520, but I have no confidence in that level acting as anything substantial.

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Disclosure:  Michael Kramer and the clients of Mott Capital own Apple and Netflix

Disclaimer: This article is my opinion and expresses my views. Those views can change at a moment's ...

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