These guys must be technicians. Who are these guys? Central bankers, of course. They must have been looking at the charts saying to themselves “we must do something now”. And on Friday, it appears that another European summit has put forth another bail out plan that is short on specifics but promises to fix all of the problems in Europe, and for the entire planet for that matter. Haven’t we seen this drill before? Yes, but for whatever reasons, the markets partied on Friday like all the problems were fixed. And good for the markets because things were looking kind of dicey.
Take gold for example. That barometer of central banker lunacy. When central bankers open their mouths and start the printing presses, gold generally responds positively. Figure 1 shows a weekly chart of the SPDR Gold Trust (symbol: GLD). Last week, GLD had broken below a key pivot point, which is an area of support. (See red down arrows on chart.) Breaks of support or where one would expect buying to surface are never good. Ahh, but by Friday, European central bankers and policy makers came through with an announcement that keeps the balls in the air a little bit longer. At least that is how I interpret the price action. As of the close this Friday and in a show of strength, GLD recaptured the prior support level. Now we can all rest easier knowing that asset prices will be propped up once again.
Figure 1. GLD/ weekly
Clearly, with gold heading lower, it looked like our economic stewards were losing the battle to reflate the markets. Same could be said of West Texas Intermediate crude oil (symbol: WTI), which had recently broken its own key pivot point or support level and was headed towards $70/ barrel. See figure 2, a weekly chart of WTI. Friday’s well timed European announcement seem to save the day.
Figure 2. WTI/ weekly
Of course, Friday’s announcement was just an announcement, and the European plan is long on hope and short on details. And it is unclear why this time should be any different. Be that as it may, central bankers and policy makers must have been looking at the charts and thinking that “this thing is getting away from us and we must do something now”. For now and in the short term, they have stemmed the tide. The debt problems still remain. The solvency problems still remain. The political problems still remain. The lack of growth still remains. Maybe the perception of doing something is better than actually doing something.
Why this proclamation was the one that “fixes” the problem is beyond me, but I suspect it has to do more with the calendar than anything else. The end of the month, end of the quarter and July 4th holiday were all reasons to jump on the bullish bandwagon in the short term. We also should have known that policy makers would do something as it appeared that they were losing the battle to inflate the markets.