European Closing Thoughts: The development of a trading thesis.

Let's put together the title of our last posts:

• This Morning: The Divergence Puzzle.
• Yesterday Closing Thoughts: Will the “Spoken” safety net hold?
• Yesterday Morning Meeting: The Spanish Compass
• October 19th: the Knockout punch
• October 15th: Commodities Dilemma

If you are asking why we wrote these titles, the answer is because these are the themes weighting in the market today.

Speaking about the US market:  the DJIA fell 1.83% to 13,101.30, the S&P500 traded 1.63% lower to 1,410.40 and the Nasdaq, the best performing index fell 1.09% to 2,983.98. Among the 10 S&P500 groups commodity companies had the biggest losses. The S&P's GSCI spot gauge of 24 raw materials fell for a third consecutive day dropping 2 percent today. Commodity wise Oil for December delivery fell 2.52% to $86.41 a barrel on the Nymex pressured by the dollar strength but mostly by growth worries. Gold futures slumped 0.93% to $1,710.20 an ounce on the Comex, December silver was down 32 cents, or 1%, to $31.93 an ounce, December copper was also down 6 cents, or 1.7%, to $3.56 a pound, December palladium led the percentage losses among the Comex metals, with the contract losing $25.10, or 4%, to $597.50 an ounce, poised for the first close below $600 since mid-August. Metals were not following the equity higher in the past few sessions, the reason why we talked about the commodity dilemma lays in the following: can you have economic growth without an increase in metal/oil consumption?

The “Knock out punch” came from after disappointing results at companies from 3M to DuPont. 3M, the maker of products ranging from Scotch tapes to dental braces, dropped 3.3 percent to $89.46. The company, which makes the majority of its revenues in Europe and Asia, cut the profit target and the top end of its goal for sales from existing businesses to reflect what it called “current economic realities.”  DuPont retreated 8.2 percent, the most in the S&P 500, to $45.68. The company said it will eliminate about 1,500 jobs after posting a smaller third-quarter profit than analysts estimated on falling demand for paint pigment. Xerox fell 7.8 percent to $6.48. The company has said it faces weaker-than-expected demand in Europe amid economic turmoil and competitive pricing. The three companies together accounted for about 50 points of the decline on the Dow Industrial.

The Spanish Compass signaled South all day as borrowing costs rose after Moody's downgraded five of the country's regions. Spanish 10-year government bond yields rose 12.9 basis points to 5.622, rising bond yields pressured European equities: the broader Stoxx50 traded 2.10% lower to 2,477.92, the German Dax was the hardest hit 2.11% lower, the Italian Ftsemib managed to close just below the 2% mark at 15,578.95 while the Spanish Ibex fell 1.64% to 7,747. Before asking to yourself why the German index was the hardest it and not the Spanish one you need to remember that the short ban has been extended on Spanish stocks such as on Italian banking stocks.

Will the “spoken” safety net holds?  The question will be answered when from “spoken” it will become “real”. Soon or later the market patience will be put on test, at that point will “words” (ref. to Draghi's speech) be able to turn the market downside up?

The Divergence Puzzle was made by two pieces: from one side the Spanish yields on the other the common currency. The euro changed hands at $1.2978 or 0.64% lower from Monday, as accelerating losses for US stocks propelled the dollar higher. The common currency and Spanish yields today moved together, closing the divergence,  because the future of the Euro area is strictly connected with the ability to keep the Iberian Peninsula afloat, based on this hypothesis, yesterday's move was a worrying sign.

Is this the end of the bull run sparkled by Central Bank intervention policies? No for the time being. But for sure the move we assisted today has to make you think about your investment/trading hypothesis. We are still in a range after a bull run, in our opinion the important thing is to be ready when the next move will come. With this in mind, our intention was to give you an example of the framework we use to trade, we hope to have been able, recalling the sequence of our posts, to show the exact path we followed for our trading thesis.

Have a great evening.

Originally posted at www.77sigmatrading.com