U.S. Stock Market - Cyprus & The European Union

To say that it’s been an interesting last ten days in Europe is probably the understatement of the century. Today we heard that Cyprus was “successful” in its last-minute negotiations with “the troika” (European Central Bank, the European Commission and the International Monetary Fund) to preserve its 10 billion Euro bailout package and thus to remain in the European Union. The final solution involves two major steps: (1) The immediate shuttering of Cyprus’ second largest bank, Popular (Laiki) Bank, wiping out Laiki shareholders and bondholders, and confiscating all Laiki deposits greater than 100,000 Euro in any Laiki depositor accounts. I hope you will forgive my use of the word “confiscating”, but this is the truth of step #1 in the basic plan. (2) Step #2 in the “balilout” plan is to move all Laiki accounts with less than 100,000 Euro to the largest Cyprus Bank, which coincidentally is called the Bank of Cyprus. All shareholders and bondholders in the Bank of Cyprus will be 100% wiped out, and large depositors there (deposits > 100,000 euro) may suffer a “haircut” (confiscation) of as much as 30%. Since the original bailout plan from ten days ago involved Cyprus finding about 5 ½ billion Euro away from the ECB, EC, and IMF, I think we can assume that confiscation of 100% of large depositor funds in the Laiki Bank and 30% of large depositor funds in the Bank of Cyprus will just about cover this amount.

The European Central Bank had threatened to cut off emergency funds to Cypriot banks after today (March 25) unless a plan was in place that would ensure the solvency of key banks. Earlier this week, a proposal to levy an unprecedented tax on Cypriot bank deposits as part of a 10 billion euro rescue plan for the country failed to win support in parliament as popular dissent mounted, but the final solution still involved all or partial confiscation of large depositor funds in the two largest banks of Cyprus, which hold approximately 40% of the entire Island’s 68 billion deposit market (which includes 38 billion in accounts of more than 100,000 euros).

U.S. stocks opened higher this morning on “relief” that a last  minute Cyprus bailout package was agreed upon, but then share prices turned lower as Reuters reported that Dutch Finance Minister Jeroen Dijsselbloem said the Cyprus bailout should be viewed as a “template” for solving banking problems in the region. Dijsselbloem later released a statement "clarifying" his remarks (backpeddling), saying Cyprus is a “specific case with exceptional challenges” which required the measures agreed upon.

Here are today’s closing marks, with changes from Friday’s close:

                                                                                    Monday’s Closing Prices                   

Dow Jones Industrial Average                        14,447.75       -  64.28            -0.44%

S&P 500 Index                                                  1,551.69       -    5.20            -0.33%

NASDAQ Composite Index                               3,235.30       -    9.70            -0.30%

Russell 2000 Index                                              945.85        -    0.42            -0.04%

Dow Jones Transportation Average                 6,134.48        -  44.78            -0.72%

While following the trials and tribulations of European finance ministers and politicians as they dealt with the Cyprus situation over the last ten days, it was not hard to envision the framework for a “final solution” when the initial tax levy on depositors was first proposed. Members of “the troika” played hardball, Cyprus overestimated its bargaining power, and Cypriot large depositors (mostly Russia) paid the price. However, what I never imagined was that any politician, banker, or finance minister would publicly endorse the terms of the final Cyprus bailout as a potential “template” for future banking problems throughout Europe. In fact, I felt confident that “everyone” would immediately reassure global financial market investors that the Cyprus situation was a one-off deal (even though depositors everywhere would probably have there doubts).

Quite frankly, I think the Cyprus deal that was agreed upon this morning will be looked upon in the not-to-distant future as the “beginning of the end” of the European Union as we know it today. Depositors in Italy and Spain are probably already thinking about moving their money to safer venues, and these same depositors will be taking direct action to accomplish exactly this goal sooner-rather-than-later.

Bottom Line: With 30 minutes remaining in today's NYSE dealings, my computer trading system was flashing potential sell signals in most major stock indexes and scores of individual issues. However, there was a minor rebound in prices into the close that resulted in no computer sell signals in any major index and a greatly diminished list of sell signals on individual issues. I follow more than 500 stocks and indexes in my system, and there were 26 actual sell signals triggered on the daily charts in 26 issues today (i.e. BAC, COP, CSX, DHI, JBHT, K, LLL, LEN, MM, NOC, TOL, WAG, WY, among others). For perspective, this is a relatively large number of signals for any single session, but I’ve seen numbers as high as 90 on major reversal days. What does it all mean? The bulls still seem to have some firepower, but the music has stopped and there are no more chairs to be found. A major stock market correction is now underway.

S&P 500 Index Daily Bar Chart with Computer-generated Buy & Sell Signals