Can't Escape the Big Picture

 | Sep 27, 2011 | 9:05 AM EDT  | Comments
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"Eschew the monumental. Shun the Epic. All the guys who can paint great big pictures can paint great small ones." --Ernest Hemingway

Overseas markets surged overnight as optimism grew that a bailout fund called the European Financial Stability Facility (EFSF) would receive permission to borrow funds from the European Central Bank. These funds could be used, much like the Troubled Asset Relief Program in the U.S., to help stabilize European banks and help deal with the sovereign debt issues.

The plan still has plenty of hurdles and many flaws, but market players are greatly relieved that there is an outline of some sort of plan on the table and that is driving the action this morning. Precious metals, in particular, are seeing a big bounce as the euro strengthens and the U.S. dollar falls.

What makes this market challenging is that it's all about the latest headlines out of Europe. Individual stock picking is irrelevant. If you are on the right side of the headlines, you will do well; if you aren't, you'll have problems -- and it doesn't much matter what investment vehicle you've chosen.

There are times when the market rewards astute stock picking and there are times when the market rewards accurate timing. This is a market right now for the big-picture market timers who like to try to anticipate the next piece of news. Individual stock pickers are going to have a particularly hard time in this market because the market isn't interested in distinguishing between good and bad stocks, and even when we do have a headline-inspired rally, only a select group of stocks participate.

I constantly hear from traders who consider themselves stock pickers that they are frustrated by this market because they can't make progress buying stocks with good charts and setups.  That strategy is being undermined by the focus on macroeconomic events.

An additional complication is that high-frequency computerized trading tends to accentuate many of the news-driven moves. The nature of these programs is to pile into any emerging trend and then, hopefully, exit quickly before they end. We saw a good example of this Monday afternoon because the action was so lopsided. Once the programs kick in, there is no back-and-forth action at all. It is just one-way and it feeds on itself as folks scramble to jump on the train.

Technically, the bounce yesterday and this morning will take the market right back into the middle of the trading range that has been in place since early August. We have now had three downside tests and three upside tests, which creates conditions for the next test, in either direction, to be the one that gains further traction. The direction will be a function of whatever the next major headline is out of Europe.

If you are more of stock picker than a market timer, this market is going to be difficult to navigate. As earnings season approaches that should change to some extent, but the standard approach of buying good stocks with good charts for position trades is not going to work well in this environment.

Adding complexity is the close of the quarter, and we are likely to see window dressing games. Big-cap momentum names like Apple (AAPL), Amazon (AMZN) and Google (GOOG) are the most likely candidates, and we have already seen them trade as a group much differently than the rest of the market.

This isn't the easiest market but, as always, the key is to keep plugging away.

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