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Stocks Break Out: Don’t Fight This Rally

Jeff Macke

Stocks around the world are exploding higher on Thursday after Eurozone officials announced a deal they hope will forestall, if not prevent, a financial meltdown in Greece from spreading throughout Europe and perhaps infecting economies around the world.

To say the deal has its detractors would be a wild understatement. Among these critics is my Breakout co-host Matt Nesto who rose out of bed like a congested Bernard King to share his doubts. Nesto dismisses today's global rally in three words: "Knee jerk reaction." He supports his view by citing Doug Kass' contention that Europe needed a "shock and awe." Nesto tells me the deal announced this morning is neither shocking nor awesome.

"What we've done is send a bunch of banks in Europe out panhandling, cup in hand, looking to shore up their capital ratios," he tells me. The deal does much the same thing to European officials who now turn to China and Japan to increase the European Financial Stability Facility (EFSF) to the $1.4 trillion level they believe is needed to calm markets.

Overall the deal is short-term and largely unfair, particularly to Greek bondholders who, Nesto notes, "can't even cash in on default insurance" because the 50% default has been labeled voluntary for official purposes.

I can't disagree much with any of the above points. It's just that they don't matter as far as stocks are concerned. The market is higher because of the simple existence of a deal, not the nuance. The irredeemably flawed Eurozone and its currency aren't going to die for at least another year. The fact of the deal only delaying the inevitable amounts to an upside surprise and is more than enough to justify a rally.

Another bullish catalyst bears love to hate is the resumption of U.S. dollar weakness. It was just a week ago that we were bemoaning the dollar strength which was killing stocks and commodities. Since then the number of dollars it takes to buy a Euro has gone from 1.37 to 1.41; a huge move for currencies and a breakout from the 1.40 mark. The S&P has moved from 1,210 to 1,270. Correlation doesn't equate to causality, but take my word for it a weak dollar helps stocks even as it causes us international humiliation.

Perhaps most importantly, this move caught a huge number of traders either under-invested on the long-side or flat out short stocks. This rally is immolating shorts and enraging those on the sidelines. Even the bulls feel like they don't have enough stock in their portfolios. You can argue about the rally not making sense and being little more than a short-squeeze. I'll concede both points even as I defend the rally. When the Animal Spirits start running you either step aside, run along, or get destroyed.

For whatever it's worth, and absolutely NOT as advice, I'm already long stocks but not long enough. I scalped a 1% trade on the S&P yesterday. I felt good about the move when I made it, yet have kicked myself over it for the last 5 hours. I'm still long, I still like higher beta names and I still want to buy dips. The difference is now support is at 1,250 instead of 1,220. I'm forcing myself to take some gains off the table as a matter of discipline, but I fully intend to reload on any pullback.

The bottom line: Stocks have broken out higher. Mr. Market cares not a whit how participants feel about it.