Chris Ciovacco's Contributions

Small cap stocks appear to be confirming the bullish signals recently given by oil and precious metals. All three markets point to a central bank induced reflation theme driving asset prices higher. From a fundamental perspective, strength in small caps shows investors are willing to buy stocks of smaller, more volatile, and less established companies.

There is no question central banks around the globe are moving closer to more easing and more money printing, which should provide a tailwind for stocks and commodities.

The current rally in stocks is relatively simple to explain. Hedge funds and institutional managers believe the Europeans are on the verge of a significant debt crisis breakthrough.

Before reviewing bullish set-ups, it is always prudent to ask, “What path could the market take to inflict the maximum amount of pain on investors?” We believe the answer is a head-fake pullback, followed by a central bank induced rally to new highs.

The real and potentially melt-up-inducing news has been coming from the European Central Bank. On August 6, we noted a few European hurdles still need to be cleared before another round of massive money printing can be launched.

As long as Europe inches forward on debt crisis solutions and the trend in stocks is up, we will continue to give the bulls the benefit of the doubt.

With a Fed statement coming Wednesday, many believe the bulls need a formal announcement of QE3, which may not be the case. The odds are extremely low the Fed does not deliver at least some market-friendly language in their July/August statement.

With little in the way of consensus relative to what actions may be taken by the European Central Bank (ECB) and Fed this week, it is a good time to take a step back and look at the health of the markets. Along the way we will sprinkle in some recent media coverage regarding this Thursday’s all-important ECB meeting.

As outlined in a July 22 video, there are still numerous reasons to be bullish relative to the intermediate-term outlook for stocks. However, there has been significant deterioration to the short-term picture in the last three trading sessions.

Tech stocks have been laggards in recent weeks, which has been a little concerning for the current rally despite the numerous bullish signals we outlined on July 16. Earnings may provide a needed push for tech stocks.

The markets face numerous problems, including still-elevated bond yields in Spain and Italy, slowing global growth, and the media’s latest obsession…the dreaded “fiscal cliff”. Yet, despite all that, stocks and commodities are flashing bullish signals.

The recent weakness in the markets is concerning, but not overly so. A Fed meeting is a little more than two weeks away. The odds are extremely low the Fed does not deliver at least some encouraging language in their July/August statement.

To the casual observer, the announcements made late last week in Europe may appear to be just another in a series of “do the minimal to get by” moves by policymakers. In reality, Germany moved off their hard-line stance, which may mark a watershed moment for the financial markets, at least in the intermediate-term.

The European Union would gain far-reaching powers to rewrite national budgets for eurozone countries that breach debt and deficit rules under proposals likely to be discussed at a summit this week, according to a draft report seen by the Financial Times.

Despite significant evidence of a possible bullish turn in stocks, we also have evidence supporting a measured approach relative to what appears to be a bottoming process.

On Thursday, a G20 representative told Reuters central banks stand ready to assist should the markets deteriorate next week. That central bank news coupled with Wall Street’s read that the Greek election will be market-favorable was enough to push numerous markets to important new highs.

The market is sapping the strength of investors. Monday’s short-lived euphoria following the weekend bailout for Spanish banks will cause many bulls to understandably lose focus. Similarly, the bears were able to breathe a sigh of relief following a Monday morning scare in the futures market.

Spain needs assistance with their troubled banks, but politicians are looking for very few strings to be attached, which is not going over big in Germany.

You do not have to be an investing expert to know events in Europe are dictating the day-to-day movements in all global asset markets. Germany is a leader in Europe because, relative to the rest of the European Union, they have their financial house in order.

The markets in the U.S have been relatively calm having avoided new lows for six trading sessions. U.S. investors expect the European Central Bank (ECB) to bail out the markets once again. As we outlined in detail on May 26, the market may be underestimating the problems...