Potential for a “Risk-On” Short Covering Rally

Author Larry Berman

Posted: June 3 2012 re-posted from etfcm

Just as soon as dollar-euro broke 1.25, it broke 1.24, and there is really no important support until 1.19ish. The bigger and growing risk is that the euro breaks up and it is destabilizing to the markets for several years. US traded European ETF (VGK) is within 2% of the 2010 and 2011 lows, so it is time for the ECB to step it up.

That could mean we are on the doorstep of a “risk-on” short covering rally, which could see the TSX jump at least 3-5% or a bit more. The time line for a catalyst is likely through the June 20th FOMC and the June 17th Greek election, so we could see some bumpy days in between.

Expect WTI to fall back to at least $80ish and Brent below $100 before energy finds its footing. We are seeing some degree of divergence with oil stocks holding in a bit better than WTI, notwithstanding yesterday’s 3.3% clocking. Building exposure to the energy sector for longer-term investors is making sense on valuation, but risk of lower lows in the coming months is still reasonably high.



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