Shore Capital Management LLC

From our comments on 4/26/10, we began to ask if the equity markets were becoming overbought. The E-mini S&P futures contract (basis Sept) gave signals of the market’s potential sell off. By 5/12/10 (post the “flash crash” of 5/6/10 where our downside targets were hit) the market was beginning to rally back and we received signals of the market at least moving sideways if not higher.

In the past few weeks we have experienced an increased correlation between the decline of equities and the decline of the Euro and ever increasing volatility swings.

From a fundamental standpoint, if EU’s economies stall, they will be buying less US products and services and potentially damaging our recovery. Keep in mind the depreciation of the Euro causes $US priced items to be more expensive (including $ denominated commodities) overseas. This was seen as many commodities prices have fallen in recent weeks. As commodity markets decline, so do commodity-linked currencies such as the Canadian $ and the Australian $.

The depreciation of the Euro has taken on a life of its own as riots in Greece occurred, the fear of contagion spreading to the P.I.I.G.S. countries and possibly to other parts of Europe. 

As we witnessed in 2008, the major tenets of an economy are confidence and liquidity. If one tenet disappears or is reduced the other will also disappear or be reduced causing more uncertainty in the markets. We have been experiencing this in recent weeks due to the confidence crisis in Europe.
 
The Euro zone is a loosely tied group of countries utilizing one currency, but with no major economic infrastructure to intervene in times of economic hardship. Perhaps this is the opportunity for Europe to develop a stronger economic infrastructure.

To understand this lack of infrastructure in American terms, think of a U.S. state needing a bailout, but instead of the topic being debated in Congress, it would be debated in the other  49 state assemblies and then the Governors of each state would meet to determine if they would bailout the other state. This scenario in Europe creates an environment of slower decision making to support Greece. The slower the process moves, the more uncertain markets become and risk aversion increases.

Many economists and traders in recent weeks have called for the demise of the Euro zone. We don’t believe the demise of the Euro will occur as the Europeans need the EU and Euro zone to remain for two major reasons:  1) The Europeans want The EU as another reserve currency beyond the $US. 2)  The EU as a combined economy has stronger weighting in the world than each member country has on its own.

On 6/3/10 we received a signal in the E-mini NASDAQ futures (basis Sept) of the market becoming oversold. On 6/11/10 we received an oversold signal of the E-mini DJ market. As of this writing tonight we received an oversold signal in the E-mini S&P futures contract. With the confirmation of the equity complex being oversold, we believe the market could rally in the short term, barring any surprising negative news.

TheE-mini S&P futures (basis Sept) has initial resistance in the 1092 to 1103 area. If it breaks above this range, the next major resistance level is 1135 to 1158. There is a potential we could see a rally towards the 1210 to 1215 range.  Initial support level is the 1082 to 1074.

The Euro (basis Sept) has initial resistance in the 1.23 area. If the market continues, the next resistance level is the 1.26 to 1.28 range and potentially pushing to 1.31 as the shorts gets squeezed.