8/3/2012
By David Urani, Research Analyst

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In remixes, musicians like to take a song that's recently been published and then remake that same song to a different tune (often on the very same album). Overnight the market seems to have taken the video of Mario Draghi's press conference from yesterday (which deflated the markets after no new stimulus was announced), thrown it on the turntables, and re-re-remixed it into a huge positive. While the employment report is taking the spotlight today, premarket Dow futures were actually up 100 points before it came out because of this.

Now that analysts have had a little while to digest his comments, they like what they see. Essentially, even though no action was announced immediately yesterday, Draghi threw out some plausible ideas that may come to fruition in the next few weeks. The main point is that the market senses some QE-style bond purchases from the ECB. He made mentions of lowering the yield curve on shorter-term bonds, which may more directly translate as buying up 2-year debt from Italy and Spain. And of course, this could be that critical spark that gets Italy and Spain the access to liquidity that they need so badly.

As opposed to yesterday, on second thought, investors are feeling good about the ECB's ability to get the support it needs to pull off purchases, even if Germany's Bundesbank is vocally against it.

If the ECB does end up purchasing Spanish and Italian 2-year and other relatively short-term debt, that means Draghi could stabilize Italy and Spain's liquidity situation just long enough to come up with a long-term fix for the euro. Add to the mix a US employment picture that may have stabilized for the moment, and we got the ingredients for a bull rally that could have legs.

This rally may have now given the S&P 500 momentum to break out of a channel, with little resistance on the way back to the year-to-date high at 1420.

  S&P 500 – 6 month

Friday Euro Markets:

• Spain – IBEX 35 +6.0%
• Italy – FTSE MIB +6.3%
• France – CAC 40 +4.4%
• Germany – DAX +3.9%

David Urani
Wall Street Strategies