Futures held up well over the long holiday weekend, but pressure has increased sharply in the last few hours. Popular political uprisings in Italy and Spain are reflecting a challenge to the European Union, which is causing bonds in those countries to fall sharply and putting pressure on the euro.
Confidence in Italian bonds began to erode last week, and that dynamic is gaining traction Tuesday morning. As a result, the 10-year Treasury bond in the U.S. is up substantially and the dollar continues to trend higher. In addition to the fallout from Italian bonds, crude oil is down again as Russia and Saudi Arabia plan to increase supplies.
The S&P 500 has been in a trading range since May 10 but it is testing the bottom of that range and the big question is whether the selling pressure created by the news this morning will cause a break in support and trigger a run for the exits.
Typically, the market has done a very good job of bouncing back from these issues. In recent weeks trade issues and the on again/off again summit with North Korea have caused some selling pressure but it never lasted long and the indices rebounded. Any furor created by Donald Trump has been a buying opportunity.
The pressure this morning isn't Trump-induced, which makes the situation a bit different. There isn't going to be the quick shift in position that the market expects when the president is involved and the "buy the dip" crowd may not be as anxious to jump in this time.
One problem the dip buyers face this time is that there isn't a big supply of positives. Seasonality is negative, earnings season is over and there are some concerns about economic growth.
On the other hand, the recent worries about rising bond yields are now history and there is little concern about a hawkish Fed and increased inflation. The issues with Italy and Span are likely to cause dovish reactions by central bankers around the world.
A gap-down open to start a new week has almost always been a good buying opportunity. The fact that there is talk that this time it is different, is a good thing for the bulls. If there was too much confidence that this latest market scare is of little consequence that can be a negative. The market loves to climb the wall of worry and the worry this morning has some substance.
It has been a tricky trading market with the indices not having much direction. However, individual stock-picking has been quite good and that will remain my primary focus.
The bears are anxious to take control of this market but we have seen too many rebounds in similar circumstances to jump to conclusions at this point. Let's see what the dip-buyers can do.