Markets Up After China Denies FT Story

Thursday, May 27, 2010

Volatility is king! This highly volatile tape offers opportunity if you are flexible and active yet it can be highly painful if you are stubborn and committed to positions. While active traders should not be complaining about a VIX at 35 it seems that most active traders would not mind a little more sanity in price movements.

Tuesday's 269-point upside reversal was followed by a 205-point downside reversal yesterday. The Financial Times reported yesterday that China's State Administration of Foreign Exchange (SAFE) was reviewing its €630 billion of Eurozone holdings. These rumors incited fear across trade desks and investors sold into the close taking markets into the red for the day. Late last night SAFE issued a statement claiming the FT story is "groundless" and they support the European Union and International Monetary Fund's stabilization plan. Most Asian markets closed up over 1% last night and European markets were solidly in the green with many up over 2%. US futures are up 1.5% pre-market following the enthusiasm and recouping yesterday's afternoon sell-off.

Microsoft (MSFT) was a major drag on the indices yesterday losing 4.1% for the day. The weakness was attributed to comments from CEO Steve Ballmer talking about contagion risks in Europe. This only seems to be a random excuse to sell an already extremely weak stock that is down 19.2% YTD v. a market that is down less than 5% over the same time period. FBR Capital issued an upgrade on shares this morning offering a $32 price target. MSFT now trades at a very modest 13 times trailing earnings even while in the midst of a voluminous upgrade cycle in many of its key products. Clearly, this stock is a slow mover but could offer a nice, stable return as a value play for the patient. Microsoft's decline pushed Apple (AAPL) into the spot as the second-largest company in the United States at $222 billion besting MSFT's $219 billion market cap. Only Exxon Mobil is larger at $279 billion.

The euro continues struggling to mount a sustained bounce off the $1.2143 low made last week. Tuesday's upside reversal along with equity markets looked promising but selling has brought the embattled currency back to lows. The recent few days of relative stabilization have been helpful to calming contagion fears but it may be a transitory feeling. Now trading at $1.2232 a new break of lows will only continue the global volatility and further stoke contagion fears.
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