Do bulls have a new, fundamental catalyst that will drive momentum and take the Dow and S&P much higher? Or will investors sell the rally and take profits while the shorts lean into the market?
That’s what investors wanted to know on Thursday after central banks around the world made an aggressive move to stem the crisis in Europe.
”It’s a good sign,” says the usually bullish trader Jon Najarian. “It says world leaders aren’t just hoping the financial woes will go away – that they’re willing to make a global coordinated effort to address the issues.”
Specific developments are somewhat complicated – but in a nutshell the ECB along with the Fed, the Bank of England, the Bank of Japan and the Swiss National bank are all offering three month loans in dollars to European banks – which have been struggling to obtain dollar funding.
As you might imagine, strategic investor and famed bear Doug Kass sees developments rather differently from Najarian. Kass says the move should only be viewed as a temporary solution – that it does nothing to assuage structural issues. Kass also says he sees current gains as an opportunity to lighten up on U.S. equities.
Considering the two almost polar opposite interpretations of developments, how can you tell if the coast is clear?
Fast traders Guy Adami and Steve Grasso have a suggestion. They say there’s probably never been a better time than now to let the technicals do the talking. ”I’m in the Doug Kass camp,” admits Guy Adami “but price is truth,” and lately the market has been climbing higher.
Both Adami, Grasso and Najarian are all focused on 1225 – and say how the market behaves at that key level will be telling.
Here’s why. “If the market can close above 1225 – investors will start saying we’ve just made a double bottom in the S&P and we’re heading higher," explains Adami.
”If that happens it’s off to the races,” adds Najarian. That's because above 1225, the fear in the market will be to the upside - that is, pros will fear missing gains more than anything else. "If you’re a money manager and if we climb the wall, it could be pretty aggressive and that's a move that pros can’t afford to miss," Grasso says.
However, there's also plenty of risk to the downside. In fact, all the traders concede that if the market fails, the down draft could be treacherous. “Both Citi and BofA say we could break above that level and then return back to 1100 or even 1000. This is a very difficult environment.”
"My expectation is that the market bumps up against resistance starting around 1205," adds Adami. "But again, price is truth and if the S&P takes out 1225 - the market goes higher."
If you’re someone who doesn’t put a great deal of faith in technicals – trader Zach Karabell thinks there’s a fundamental reason to feel bullish – long term.
He says developments overseas are a sign that “the dissolution of the euro is not in the cards – the costs are mind-boggling,” he explains. “That’s why the Chinese are coming in – my bias is toward the upside.”
What do you think? We want to know!
