An Irrational Market

Stock Markets around the world rallied last Thursday when Mario Draghi, President of the European Central Bank, announced the acceptance by the ECB’s governing body of his plan (OMT) to ease the European debt crises. But on Friday, U.S. markets reacted like dear in the headlights to yet another lower than expected employment report. The U.S. markets are transfixed to the idea that this will pave the way for another round of “Quantitative Easing” by the Feds.

Both of these market reactions are irrational or premature at best. First, the ECB plan will never get past the planning stage if the top German constitutional court rules on Sept. 12 against the country’s participation in the European Stability Mechanism.  Even if the courts rule in its favor, the Chief of Germany’s central bank opposes this plan and wants the politicians to weigh-in. Furthermore, Mr. Draghi’s plan requires each participating country to agree to additional reform measures.  It is questionable whether Spain, Italy, or Greece can or will agree to additional austerity measures. Bottom line, this is far from a done deal and it certainly won’t be an instant cure to the problems facing Europe. Another European recession is all but certain regardless of the ECB plan.

Second, the Federal Open Market Committee (FOMC) meets this week to discuss QE III and there is no guarantee it will be enacted. Many are arguing that another round of Quantitative Easing will not do any good now. Interest rates remain at historic lows, and corporate earnings projections around the globe continue to weaken. Hardly an environment ripe for spurring increased investment for growth.

As the market continues to climb based on hopes and dreams the farther it must fall if the dreams don’t come true.

From a technical perspective the market volume has been extremely low all summer.  As a matter of fact, it hasn’t been this low since 2007. Large movements on low volume indicates that a small number of big players are making huge speculative bets.  Bottom line, this will continue to be a rough playing field until we have some certainty in the direction of the economy.