Headwinds Are Gathering

 | Jan 04, 2012 | 8:31 AM EST  | Comments
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apkt

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intc

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txn

"We must look for the opportunity in every difficulty instead of being paralyzed at the thought of the difficulty in every opportunity." --Walter E. Cole

The market enjoyed an upbeat holiday season, but now the question is whether worries about Europe will plague us again. We have had a few better-than-expected economic reports lately, but debt issues in Spain, Italy and Hungry are causing pressure this morning. Market players are watching bond auctions carefully and are concerned about a weak reaction to an offering by UniCredit, which is Italy's largest bank.

In addition to the percolating European debt worries, we had another earnings warning in the technology sector. This warning was from Acme Packet (APKT) and adds to a list that includes Intel (INTC) and Texas Instruments (TXN). This has been the worst quarter for warnings in a couple years and given how well the indices have held up, you have to wonder about a challenging earnings season. We really haven't seen much negativity priced in so far, and if expectations start to drop, it is going to create a tough headwind.

In addition to the news flow, the technical picture also looks vulnerable. Positive seasonality ends after today, and after Tuesday's gap up, we are slightly overbought. We've had a low volume V-shaped, Santa Claus rally over the last two weeks and are ripe for some consolidation and profit-taking. It won't take much negative news to serve as a catalyst to trigger some selling.

I don't want to be overly negative here, but this market has used up a lot of energy recently as it pushed up to conclude the year around flat. We are running out of gas and the big gain yesterday was quite deceptive. We had absolutely no traction following the gap up in the morning. The intraday action was weak and there are clear signs that the end of year window dressing is unwinding.

One of my goals for 2012 is to be more aggressive with the short side when the time is right. I tend to become cautious at the right time, but I need to take that a step further and try to profit more from weakness when it does occur. It requires a bit more anticipation and some faster reactions, but when shorts work, they pay off handsomely.

The action felt tired yesterday after the gap-up open and I saw far more short setups than long opportunities, so I'm going to watch the dark side carefully. I'd like to aggressively pursue some longs, but we don't have much leadership or momentum.

Don't let your guard down. This market is going to become even more challenging as earnings season approaches.

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