As Goes Europe, so Goes the U.S. Stock Market

 | Sep 14, 2011 | 8:35 AM EDT  | Comments
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"In America, there's a failure to appreciate Europe's leading role in the world."

--President Barack Obama

For the sixth day out of eight, the market is set to gap up or down more than 1% at the opening bell. According to SentimenTrader.com, this has occurred just seven times since 1982.

There isn't any big mystery about why this is happening. We are at the mercy of news out of Europe and reacting every morning to the latest developments. Unfortunately, the moves have been downright random. But the good news, according to SentimenTrader, is that this sort of action has tended to resolve itself in a positive manner.

What is particularly interesting about sentiment right now is that so many market players believe the European banking crisis is far from over. Despite the constant efforts of European leaders, the consensus seems to be that a Greek default is just a matter of time. Nonetheless, we have had countless Greece-is-saved bounces, and we are seeing another this morning as we await the latest comments from German/French President Merkozy.

I don't need to point out that news-driven gaps every morning make navigating the market difficult. Neither bulls nor bears can be too comfortable when the main market driver is the next headline. Individual stock picking is useless when there is so much focus on macroeconomic concerns, and there aren't many leaders or good charts to be found.

We have only two choices to deal with this sort of market environment: Stand aside and wait for better conditions or adopt a very short-term approach and try to seize quick gains. If you take the latter approach, be ready to do some work because the easiest way to get in trouble is not to manage positions closely.

It is not my style to make grand market predictions. I believe it makes you less objective and impairs flexibility; however, I am contemplating various market scenarios and I believe the major risk is to the downside. If the S&P 500 comes close to testing the 1120-1125 area again, I believe it is going to get very ugly, very fast.

But that is not the business of the moment. We have a gap to the upside on hopes of positive news about Greece. This is our third straight positive day and you have to contemplate fading the strength. On the other hand, as I've often pointed out, these bounces have a strong tendency to go further than many folks think reasonable, which squeezes the bears and causes underinvested bulls to chase.

Probably the biggest positive this market has going for it is that there is a very large group waiting for another shoe to drop in Europe. Many think it is inevitable, and that is keeping bearishness high. Even if they are wrong, the uncertainty will persist for a while and that is going to make the upside difficult.

Given the overall technical picture, I will maintain a skeptical attitude about the market but I'll continue to look hard for short-term trading opportunities. Even if you think this market is doomed, that doesn't mean we won't have good trading to the upside in the short term.

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