If you look for the bad in people expecting to find it, you surely will. --Abraham Lincoln
After a good report from Apple (AAPL) and a little pep talk from Fed chief Ben Bernanke, the market looked a bit healthier Wednesday but was it just an oversold bounce in the context of a developing downtrend or a meaningful reversal that will gain further traction?
If we take a bearish view and look for the bad in this market, we can certainly find it. But what is the bullish case here? The bullish case is that AAPL's earnings report helped to confirm that overall earnings are really quite good. The 'beat rate' vs. analyst expectations is at the highest levels in years, and most companies are expressing some level of optimism about their business.
In addition, many money managers lagged badly in the first quarter when the market went straight up. They desperately need some relative performance to catch up with their benchmarks and many are still underinvested. They are loathe to sit on the sidelines again if the market ticks up and they are likely to provide good support as they try to find some alpha. In view of how often the market has put together very swift recoveries when it looked technically vulnerable, it is very dangerous to be too bearish.
The bearish arguments seemingly are easier to make and have more weight, but how often has that been the case the last few years when the market ramped higher? Europe is becoming problematic again with the pending election in France and sovereign debt issues percolating. In the U.S., economic data has been soft recently, the durable goods report yesterday being the latest example. The market has shrugged off the data to a great degree in part on hopes that softness will lead to QE3, but even though Bernanke assured us that he is ready to act as needed, it might not be as aggressive as the market would like.
The bears argue that the high number of earnings reports that exceeded estimates is only happening because estimates were dropped so quickly recently. Estimates have been low-balled and the markets failure to rally on all these "beats" is proof that it isn't fooled. Overall, year-over-year earnings growth is a bit better than 4%, which is the slowest growth in more than two years.
The market is still working to recover from the technical breakdown that took place to start the second quarter. We are working on our third bounce try after the first two failed. We are back at the top of the recent trading range but volume, momentum and leadership are lacking. That often doesn't matter in a market that has produced V-shaped bounces, but it doesn't inspire a high level of confidence.
The bulls have an opportunity to put the screws to the doubters again. The pattern of big-picture negatives and a weak technical pattern have so often been the setup for further upside that no bear can feel very confident. In fact, from a contrary standpoint, the easier it is to make a negative argument against the market the more likely we seem to rally.
Europe is mostly red and we have a mixed start to the day. We'll see if the bulls can build on yesterday's reversal, but the headwinds remain strong and with no quantitative easing to provide a boost of liquidity, the V-shaped bounce may not be so easy.
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