Breakout

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Italian Bond Yields Fuel Global Stock Sell Off

Breakout

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Rome is burning. There is no other way to describe the madness emanating from Italy today. Just yesterday the country fueled optimism and a rally on word that embattled Prime Minister Silvio Berlusconi was resigning. But today the increased likelihood of that actually happening sent Italian bond yields soaring over 7%, sending global markets sharply lower.

At the same time, similar promises are coming from Athens where the tenure of Greek Prime Minister George Papandreou can best be described as minute-to-minute. The other embattled PM of Europe formally announced his resignation, but failed to name a successor, leaving his press conference with a soap opera-esque cliffhanger.

The short-term result is a classic flight to safety or risk-off trade, yet investors like Rob Sluymer, a technical analyst at RBC Capital Markets, are not only buying the dips, but are focusing on the riskier end of the sector the curve by gobbling up Cyclicals.

"The way I see things developing is that the stock market is now on its third upside move from the cycle lows that developed in the latter part of 2008, beginning of 2009," he says in the attached clip. Despite referring to the Euro disaster du jour as ''frightening stuff,'' Sluymer is sticking to his short-term momentum indicators. "The underlying technical action in the stock market, particularly in cyclical stocks, still seems to be relatively healthy,'' he contends.

As regular readers know, I have been waving the caution flag about recession in the European Union for weeks; a stance that not only calls into question the sustainability of crude oil in the mid $90's but, undercuts the regional and/or global growth story. Sluymer disagrees on timing.

"There's a seasonal bias behind stocks here," he says. "The technical action seems to support a recovery into the end of the year or into first quarter."

He does concede that the bigger macro, fundamental worries will keep things in check for a long time, and doesn't see "another major inflection to the upside until 2014."

So in the spirit of making hay while the sun is shining, Sluymer is tracking indicators like the Smart Index that contrast emotional purchases at the opening bell versus supposedly more tactical or smart buys in the final hour of trade.

"Our short-term indicators that track two to four week shifts, peaked the last two-weeks of October," he says. "They're now starting to bottom out so we're getting set for another upside move in our opinion".

It may not feel like it now, or for the next week or so, but Sluymer insists the bull market that began in March 2009 has one last push to go.

Agree? Let us know in the comment section below.

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