Success requires enough optimism to provide hope and enough pessimism to prevent complacency.
-- David G. Myers
The market is kicking off the week with another "Europe is saved" rally. This time the leaders of France and Germany have agreed on a plan to make a plan. There are no solid details, but that combined with the partial nationalization of embattled Belgian bank Dexia is boosting financials and giving the market some early buying interest.
There still is very little in the way of specific solutions to the European debt crisis, but there seems to be a reflexive buying action every time there is a slightly positive headline. I suspect that there are just too many folks unprepared for upside and we see some fast short-covering by the bears and a rush to find some additional long exposure by the bulls.
Technically the indices are back in the middle of the trading range that has been in place for more than two months now, but the break to a new yearly low last week and the quick recovery is a technical positive. My thesis has been that we needed to actually break the support at August lows to create some capitulation and wash out some stubborn hope; we did exactly that last Monday and Tuesday.
The subsequent bounce was a bit quicker than I'd like to see, but it is a sign that the dip-buyers regained confidence and are now likely to provide some support. The action this morning indicates we are still highly sensitive to news headlines out of Europe, but that should change somewhat as we begin to focus on third-quarter earnings this week. Alcoa (AA) kicks things off tomorrow afternoon and then we have JPMorgan (JPM) and Google (GOOG) later this week. The big reports start to roll in next week and, hopefully, we'll see some increased interest in individual stock picking.
Although the market is in a rather muddled technical position right now, analysts at both Citibank and Oppenheimer are anticipating an "impressive" and "surprising" fourth-quarter rally. Both firms believe third-quarter earnings will be quite good and they believe conditions are good for a strong rally.
It is not my style to make predictions of that nature, but I do concur that the conditions are in place for good upside move. The biggest potential stumbling block will be a lack of clarity about the European debt crisis, but if we can overcome that, optimistic earnings reports could be substantial upside drivers.
Despite the poor economy and all the economic headwinds of the last few years, earnings have generally stayed quite strong. It has been interesting how few warnings and misses there have been. The macro concerns have been the big drag, while the micro has tended to be quite solid.
Although I'm feeling optimistic that we have a low in place and may see a good run into the end of the year, I'm not very happy about the technical setups that I'm seeing. We never have many good charts when we are coming off the lows, but there is an unusual lack of leadership in this market. There have been no safe havens lately, and you've had to buy weakness or chase strength if you've wanted to put cash to work. There is very little with solid support or good chart patterns.
We always need to be a bit skeptical about a Monday-morning gap up, but based on the above thinking I'm inclined to be adding some long exposure if I can find some setups.