"The crisis is not over. Not just in Europe is it not over, it is also not over in other regions of the world."
-- Juergen Stark, European Central Bank policymaker
Soft economic data in Europe are creating some early selling pressure as we await weekly unemployment claims and the ISM report. The market looked tired yesterday as the early strength fizzled and the close was weak. But bullishness has been on the rise recently, as hope that the Fed would ride to the rescue one again has been percolating.
The major problem this market faces right now is that traders are wrestling with a slew of big-picture negatives. The European sovereign debt issue is far from resolved and there are clear signs that the world economy is slowing once again.
Juergen Stark, who is quoted above, also commented that the U.S. has an "enormous" debt problem and lacks the structures to get the problem under control. He is not alone in his view, and persistent unemployment and a faltering economy are not making it any easier to make a counter argument.
It doesn't take a genius to conclude that the economy has issues. There are plenty of people out there who can dissect and discuss those issues in great detail. My focus is primarily on what it means to the market and how we can navigate the cross currents and make some money.
Just because the U.S. has debt issues and a lousy economy doesn't mean that stocks can't go up, although it certainly doesn't make it easier. Over the past few days, we have already seen that just a hint that the Fed is going to act with some form of QE3 can drive stocks up. Many question whether this really is going to produce a lasting benefit this time, but in the near term, the perception of the power of the printing press gives the market a boost.
As always, we have to focus primarily on the price action and not let the debate about fundamentals unduly influence us. There are always compelling bullish arguments and brilliant bearish theories but, ultimately, the market decides and that is what we need to focus on.
Unfortunately, the big picture isn't all that rosy. The S&P 500 has had four straight positive days and has even managed to break through overhead resistance at 1205-1208 but we saw an intraday reversal yesterday and momentum slowed substantially. The big breakdown in early August has created substantial overhead resistance and even the most optimistic bull doesn't seem to think we will be able to make it any further than 1250 or so before we encounter some still headwinds.
What I find most troubling about the market is not the state of the major indices but the state of the vast majority of individual stocks. I see no real leadership other than precious metals and most charts need more work before they will be very appealing.
Take a look at some of the high-beta, big-cap favorites such as Google (GOOG), Netflix (NFLX), Salesforce.com (CRM) and IBM (IBM). They have all bounced straight up on lighter volume and are now in need of some consolidation so that the short-termers who caught the lows can exist and stronger hands can move in.
It looks like the going to the upside will be tough, especially with the negative news flow we are seeing. The Fed can help to prevent the bears from becoming too comfortable but the technical picture needs to improve before we can put much capital to work.
I would really like to be more optimistic and talk about all the great looking setups that I can't wait to buy, but they just aren't there right now. We'll keep digging and watch for things to develop but the big danger is forcing buys when conditions just don't justify it.
Weekly jobless claims come out at 8.30 a.m. EDT and then the ISM number will be released at 10 a.m. That will set the tone, but, technically, conditions are ripe for some selling and we'll have to watch for even positive news to be sold.