Market Exuberance Over Greek Default?

Market exuberance displayed after the Greek default deal was announced may provide for short or intermediate term market gains, but I have one question.  If it is such good news that Europe has negotiated a deal to allow Greece to default on 50% of their debt why not just allow them to default on 100% of their debt?  As we saw over the weekend and today this story is not over yet.  We are now seeing market concern over Italian debt driving Italian bond rate over 6 percent.  This is exactly what should happen when a borrower has overextended themselves, and if allowed to occur this would limit future borrowing and stabilize markets as investors chase the potential for higher returns in the bond market.  However, we will likely witness attempts by the European Union to protect low bond rates.  These attempts to control the natural market response will likely manifest as unintended consequences.

I have updated the sentiment chart below to indicate on the price line buy, tentative buy, sell, and tentative sell periods (see legend).  It is important to note that as long as the green line remains below zero the market remains in a long term buy period, but I suggest that you only make market entries on days when the market closes at least 2% lower.  Always utilize a cost averaging methodology to avoid over commiting to any single entry or exit.  The buy, tentative buy, sell, and tentative sell signals are based on a set of consistent rules applied to the data set.

1. Buy - a buy signal (green) which indicates a long term signal has confirmed its trend.
2. Tentative Buy - a buy signal (yellow) that indicates a good opportunity, but the signal has indicated before a long term trend is established.
3. Sell - a sell signal (red) which indicates a long term signal has confirmed a trend shift.
4. Tentative Sell - a sell signal (purple) that indicates a good opportunity, but the signal has indicated before a long term trend is established.

Chart 1: 10/31/2011 S&P 500 Market Sentiment

Chart 2: 10/31/2011 S&P 500 Ultimate Sell Signal