The Euro Decline

 It's little wonder that there was so much downside pressure on the market today, the legacy arbitrage relation between the Eur/$USD and the market has been fairly stable except for times when Central Bank intervention was in play, such as QE/QE2. This is today's Euro action alone, which should tell you something about confidence in Europe to find a solution.

 This is the triangle in the Euro from last week and the break below it I mentioned Sunday night as FX markets began to trade.

 If we consider the legacy correlation and the fact there's no real QE going on, we can see that the Euro has retraced the October rally and thus one would expect the market to be in close proximity to doing the same. My guess is that there's been manipulation to keep the market at loftier prices and probably not for bullish reasons when everything is put together.

 Here's the S&P-500 vs the FXE Euro ETF in red, this would suggest to me, the same thing I noted earlier when looking at the credit indicators, the market looks very close to closing dislocations it has with risk/credit assets that should have rallied with the market in a strong risk on environment, it's almost the same thing as weak market breadth or a poor A/D line, which are other subjects that I will look in to.

Here's the Dow. If the pattern of past dislocations plays out, we should expect to see a pretty linear drop, most of the prior dislocations didn't fool around too long in retracing back to the risk/credit mean once they got started.

This is why I said today that I would consider using ANY market price strength to add or initiate short positions as it seems we are close to an unwinding of the dislocation. The 1 min chart today in the SPY showed several attempts to move up on the 1 min positive divergence, they appeared as spikes in price which failed quickly, usually in a minute or two so there appears to be some real selling pressure going on and that would make perfect sense to me considering how the EU blew it once again and the future of the Eurozone seems to be more unpredictable then ever. In a few short months we went from the threat of contagion among other PIIGS countries to signs of contagion directly in the core AAa rated countries, which now face imminent downgrades from at least 3-4 different ratings agencies, as well as a downgrade of the Euro-zone and the bailout mechanisms and lets not forget the banks.

Things certainly are moving at a brisk pace. Last week the underlying assumption was the EU would agree to treaty changes that would give the ECB room to print, not only Britain, but several of the stronger northern AAa rated countries that are key to making donations to the ESM bail out mechanism are either not happy about the Mer-Kozy plans or have vetoed them outright. What is most striking about all of this is that the ECB has made clear it won't print, however the market expectations were that treaty changes could lead to that eventuality, yet we find out today that Draghi himself was surprised to hear that the market and probably the EU/Germany/France had reached that conclusion. The market can be excused to some degree as they may very well have thought that there was good communication between Germany/France and the ECB before proceeding with the failed summit, however it is much harder to excuse Germany and France of misreading the situation so badly and it still amazes me that the fate of the entire Eurozone rests with guesses and assumptions. It's almost hard to believe that they can be this incompetent and one almost wants to believe that they actually do know something that the rest of us don't, although with umpteen failed summits, it wasn't too hard to figure out that this one would be a failure too, even though you have this gut feeling that there must be some level of competency that moves these summits forward, apparently there is not. As I have said on the site and in many emails with members, if the EU knew how to make 2 and 2 equal 4, it would be done by now, there's no point in waiting until 4 credit ratings agencies are moving toward downgrades of AAa status.

To make things even more unpredictable, as I noted, the front runner in French elections (it's not Sarkozy) has made clear he will abandon the EU treaties and agreements thus throwing everything the EU has done (which isn't much) in to total disarray and makes the literal point of several wasted years of  EU plans.

We also now know that the very opaque Chinese government is fessing up to contraction, inflation and a housing bubble. Any reasonable person MUST question how much worse the Chinese economy is as the Centrally planned country has more often then not, been much less then forthcoming with the truth, several degrees more then our own government who may fudge the numbers, but usually corrects them through revisions, even if it takes 2-3 revisions to get there (they know that the market is only interested in the now so revisions won't harm anything as the market has moved past them).

All in all, I've never seen anything like this, the pace at which things are moving and that too makes sense as the world grew a lot smaller over the last few decades through trade agreements and organizations to create a truly globally linked economy, something we never saw before so it only makes sense that the pace at which things are deteriorating is understandable as we are seeing for the first time what happens when not a country goes in to recession, but when the entire world is on the brink.

What is truly scary is to think about what the end of the story will really be and it reminds me of the white paper I read last week by one of the major banks that said, invest in metals, "gold, canned food and small caliber guns".