Schaeffer's Trading Floor Blog

Draghi's Promise Lifts Global Markets

Wall Street should approach this 'engineered rally' with a caution

by 7/26/2012 12:21 PM
Stocks quoted in this article:

At about 6:00 a.m. EST, Mario Draghi, President of the European Central Bank (ECB), made public remarks that he will, "Do whatever it takes to preserve the euro." Markets reacted very favorably, with a "risk on" mentality, as S&P 500 (SPX) futures rallied nearly 25 points in about an hour. European markets closed markedly higher, with the Spanish IBEX 35 leading the way with a 5.5% rise on the day. In addition to the dramatic upswing in equities, Spanish 10-year bond yields were down sharply, taking them below the 7% mark.

Sentiment toward this rally is very, very skeptical, and there is definitely some merit to this cautious attitude. This rally was essentially "engineered" by a single comment from Draghi, and what he said is nothing new. Today's reaction to "recycled" news is a further sign of very low conviction by active market participants. Today's move is added evidence that trades should be sized accordingly until we can get some sort of resolution to the entire crisis situation and the SPX can break from the current 1330-1375 range. Until then, it is prudent to keep your time frames short, find stocks that are moving on news, or trading in a hedged fashion.

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