Leading Irish experts now believe Euro break-up more likely

Dow Jones confusing signals may last to 2013

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The European Central Bank has indicated it may again start buying government bonds to reduce crippling Spanish and Italian borrowing costs but the conditions it set and the dissenting voice of its key German member disappointed markets.

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Today, Friday, Ireland's most influential newspaper; the Irish Times, had its main economics editor Dan O'Brien reporting that he has raised his probability of a breakup of the Euro from 15% to over 50%. This is mainstream media not some off-world blog. Such articles would not be appearing in premier publications unless the Irish establishment was actually preparing for the possible demise of the Euro.

Across the Irish airwaves other economists were picking up on Mr. O'Brien's comments. They too reckoned the Euro would fall and soon. Jim Power, one of the top economists with an Irish bank, pointed out that the European "model" had failed. He believed like the Irish Times journalist that Germany was walking away from Europe and was deciding to tie in its lot with Poland, Russia and the East rather than the West. Strange times indeed.

Dow Theory Schizophrenia

I have been teaching stock market investment now for over two decades. One of the first modules I present in my course is  called "understanding the markets". The main conceptual paradigm I use in this exercise is Dow Theory coupled with Advance/Decline Line (ADL) analysis. In all my time monitoring and teaching Dow Theory I have never experienced such "schizophrenic" technical signals as those charted over the last 4 months.

I am not alone. At the end of April most Dow Theory commentators read a classic Dow bear market sell signal in the technical picture. The Dow 20 Transports had failed to break new highs set by the Dow Industrial 30 and then both indices broke below previous lows. This Dow bear trend had been forewarned by the ADL on the 16th April when the Dow Transports daily moving average (DMA) broke below the 50 DMA. However despite this "sell" signal, markets rallied and the 20 DMA on the ADL broke above the 50 DMA on July 5th. Thus in summary the bulls were killed in April and the bears were slaughtered June/July Thus Dow Theory is not giving the reliable technical signals it is historically renowned for.

In my view the main catalyst behind these confusing gyrations is the Euro crisis. In April the markets were reacting to the confusion surrounding the dire situation in Spain. By June as soon as the crisis appeared to have been solved the markets reacted accordingly. Thus I think it is fair to say that until the Euro crisis is finally resolved, either way, the markets can be expected to give very mixed signals. Markets do not like uncertainty and it is probably only once every 50 years or so that a "doomsday" event like the potential breakup of the Euro Zone appears on mister market's radar.

Major crises spawn major confusion.

The political classes on both sides of the Atlantic should take this fact on board. The last thing the markets want is the current status quo to persist. We do not want 20 years of a stagnating Europe, al la Japan. Germany must decide if it wants to remain benefiting from a 100 billion a year trading surplus with its Euro partners and cough up to Euro bonds accordingly or it should revert back to the Deutschmark. Yes there will be fallout but as with Mexico in the 1989, Argentina in 1990 and Russia post 1991 there is life after default and devaluation.

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