S&P 500 Supine in Spite of Draghi's Stimulus

March 10, 2016

Mish's Daily

By Mish Schneider

When Tempered Glass Breaks

Today I received a new screen protector for my iPhone. The instructions were so clear and simple to follow.

Use the wet cloth to wash the screen, the dry cloth to dry the screen. Place the guide stickers at the lower left and upper right of the screen to direct the tempered glass protector. Peel off the tempered glass protector from its plastic strip and using the guide stickers, place the glass on the iPhone screen.

I felt so accomplished placing the protector perfectly on my phone. And I never had to ask Keith to help me!

Early on Thursday, Draghi also sent clear and simple directions to the market. His intention of protecting equities with his version of tempered glass-negative interest rates-did not work as well.

The day began strong enough. The S&P 500 opened higher and tested the resistance area of 200-202, washing the dirt of the screen so to speak. For the first ninety-minutes of the session, SPY even went so far as to properly dry the screen. The two guide stickers seemed intact. The highs and lows of the session at that point, got both the bulls and the bears engaged.

What happened when Draghi’s news (or tempered glass screen protector that was meant to stimulate the market) was peeled from its plastic strip?

One and half years ago, the ECB became the first major institution to adopt a negative interest rate policy. Seen by many as an act of desperation, Draghi states he has “no limits” on what he will do to stimulate borrowing.

Negative Interest Rates means that if you deposit money in a European bank, you are charged to keep your money there. Tempered Glass?

If it works, banks are forced to basically give away money. The intention is to stave off deflation and get folks to spend money. Simple supply and demand theory, more demand, less supply-screen protected.

The arguments against it though, are compelling. Depositors are not incented to put money in the bank. Banks, that depend on savers, see their funds go dry. Banks, if they see a drop in their profit margin, won’t lend money freely. As more central banks use negative rates, a currency war might ensue.

As the Draghi-drama plays out, the SPY sets the stage for its own histrionics. The Head and Shoulders Top illustrated in last night’s daily is far from resolving.

We could see that potential formation turn into a ginormous double bottom (September-October 2015 and January-February 2016), should SPY clear 204. Or, if SPY breaks 193 and then later on 181, we could also see another 30.00 point drop from there.

For now, Draghi’s tempered glass screen protector is preventing the underlying screen from breaking. Different than regular glass, when tempered glass breaks it crumbles into small granular chunks instead of splintering into jagged shards.

However, tempered glass has been known to shatter completely upon hard impact.

Enter Janet Yellen and the gang next week!

S&P 500 (SPY) The key to seeing this close flat is that it held the upward sloping 10 DMA, a feature I wrote about on Monday. 200 pivotal. 202 resistance and 196 daily chart support

Russell 2000 (IWM) More vulnerable than SPY, this has to recapture 109.50 and hold 102.75

Dow (DIA) 172.50 big point to clear with 165 point to hold

Nasdaq (QQQ) Held the 50 DMA. Over 106 will look at 108. Under 103.50 see 100

XLF (Financials) Earlier in the week I wrote we would see 21.75 before 22.49. Ok, now that that’s out of the way..which one breaks first?

KRE (Regional Banks) Held the 50 DMA

SMH (Semiconductors) Back over the 200 DMA and an unconfirmed Recovery phase-perhaps the most encouraging sign

IYT (Transportation) 134.00 level support. 136 number to clear

IBB (Biotechnology) Living in its lonely Bear world

XRT (Retail) If breaks under 44.20 we got a reversal in the works with support down at 43.00. Over 45.56 life.

IYR (Real Estate) Holding the 200 DMA

GLD (Gold Trust) Long term bias bullish

SLV (Silver) Looks good and will look better if closes over 15