US stock futures are headed for a sharply lower open Wednesday as Italian borrowing costs spiral out of control. S&P futures are 30 handles lower this morning as the Italian 10-year bond yield surged above 7%, a dangerously high and unsustainable level. The spike has rekindled fears that the European sovereign debt crisis is beyond repair and spiraling dangerously out of control.
The market surged the last two days in a thin tape amid hope that Europe was taking the necessary steps to contain the crisis. Yesterday, news that Italian Prime Minister Silvio Berlusconi would step aside sparked optimism about the country’s ability to enact the necessary financial reform. However, now with bond yields past 7% most view Italy as past the point of no return. When Greek and Portugese yields reached those levels earlier this year, they were forced to seek bailouts. However, Italy is a much larger economy (3rd largest in the Eurozone) and may be too big to be bailed out. European markets dropped sharply.
Earnings in the last 24 hours did not help the cause, either. General Motors (GM) is down 6% in the pre-market after it saw third quarter profit fall to $1.7 billion from $2.0 billion. Software maker Adobe (ADBE) is down 10% in the pre-market after announce 750 layoffs in North America and Europe as part of a restructuring plan. The company also revised down its quarterly earnings forecast. Look out for Cisco’s (CSCO) report after the close today.
Broken Patterns can really hurt! Over the past two days we have been saying to ignore the headlines and focus on the price action, which has been very bullish–with one caveat: volume. The tape has been dangerously thin and it seems like big players have been steering clear of the action. When very bad news hits a thin tape, it can have a devastating impact.
Today will be a day to measure commitment to the rally. Today you must figure out what time frame you really trade on. Traders have been trying to stand firm on longs, even in the face of some troubling headlines, but hedging was certainly a necessary ingredient to the trade.
Today could turn out one of two ways. We can open down 275 points on the Dow and close down 400+, which would obviously be very bearish, or we open down 275 and close down 50-100, which could be deemed as a great escape. Traders need to have key support levels in front of them and see if any leading stocks or sectors can go green! Can we salvage some of the trade and get a bit more comfortable?
Key support in the S&P is 1235-1240, which would be a spot to cover some hedges and see if you can add to longs. 1215-1220 is bigger support, this should hold today unless things get really out of hand. You can be sure European officials will look to soothe the market with rhetoric, but the market could be tired of talk and innuendo at this point.
By John Darsie
Disclosures: Scott Redler is long AAPL, GOOG, JPM, BAC, JDSU, REDF, SIFY, SLB. Short SPY, GLD.