European Bazooka Proves to be a Dud - Oracle (NYSE:ORCL)

Despite the European Central Bank's best efforts, equity markets rolled over in early trading on Wednesday, as stocks traded lower after experiencing a tremendous run on Tuesday. The Dow Jones Industrial Average traded about 0.50% lower, while the NASDAQ's loss was almost triple that. A decline of nearly 14% in Oracle's

ORCL

stock may have been contributing greatly to the NASDAQ's loss. Oracle reported disappointing earnings on Tuesday, and tech investors may have become spooked by the industry leader's disappointing results.

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subscribers were alerted to Oracle's earnings miss in real-time. Still, Oracle's loss alone cannot so easily explain the bearish activity in the broader market. On Tuesday, the Dow rallied over 300 points. In retrospect, that move may have been a vicious short squeeze rather than a legitimate confidence-fueled buying session. On Wednesday, bids for the ECB's

Long Term Refinancing Operation

(LTRO) came in better than anticipated. This could be bullish for the market, as it may buy more time for European sovereigns to get their financial houses in order. In the best-case scenario, European banks would use their improved position to purchase the bonds of indebted sovereign nations. In recent months, the yields on these bonds have spiraled as investors have become increasingly concerned with the prospect of being paid back. In fact, spiraling yields on sovereign European bonds contributed in large part to the collapse of MF Global. If the optimal scenario plays out then the yields on European debt may be expected to come down. That might signal to the market that the situation in the Eurozone is slowly being resolved, which could correspond to stronger equity valuations and a stronger euro currency. Of course, if that does not happen—and the LTRO fails—then the situation may be seen as worse than before, as the LTRO will be yet

another failure

in a string of solutions designed to alleviate the market's concerns with the Eurozone's crisis.

ACTION ITEMS:

Bullish:
Traders who believe that, despite the lack of enthusiasm displayed early on Wednesday, the LTRO is a step in the right direction for the Eurozone may consider:

Taking a position in US equities. Given the slight weakness shown on Wednesday, now may be the time to consider initiating or expanding positions. If yields on European debt tumble, stocks could continue to rally in future sessions.

Go long the euro. The euro has come under selling pressure, particularly against the US dollar, as doubts about the future of the currency have dominated the market. If those doubts are reduced, the EUR/USD pair could rapidly rally.

Bearish:
Traders who view the LTRO as simply another failed experiment in the ongoing Eurozone saga may consider alternative plays:

Short US financials. Financial stocks in the US have come under pressure due to possible contagion fears. These stocks may trade lower if a financial crisis emerges from the situation in Europe.

Short industrial commodities such as oil. If the economic situation declines further, the demand for these commodities could recede. Traders who do not wish to play oil in the futures market might consider an ETF such as the US Short Oil Fund DNO.

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