The Stock Pickers' Dilemma

 | Oct 21, 2011 | 4:50 PM EDT
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Mediocre earnings from IBM (IBM) and Apple (AAPL) created downside pressure this week, but optimism about a potential solution to European debt provided solid underlying support and kept the bears off balance. Market players remained intently focused on European headlines and, ultimately, the hope that next week's meetings will resolve the crisis held the market up. It also didn't hurt that the bears and underinvested bulls were caught out of position yet again.

It seems like a straightforward cause-and-effect relationship between optimism and buying this week, but the underlying market action is anything but easy. We continue to have very correlated action between stocks. They all move in one direction or the other, which is the hallmark of exchange-traded funds and computerized and high-frequency trading.

I've written quite a bit this week about how frustrated many market players are by the futility of individual stock picking. All that matters now is timing the reaction to headlines. It doesn't matter what stocks you buy since they all move together, but it causes a lot of consternation for traders who focus on charts and fundamentals as a way to produce superior returns. They have no edge in this market and there isn't much they can do about it until the focus shifts away from the headlines. If you are a stock picker rather than a market timer, this is not an easy market.

Earnings have been a mixed bag so far, but we still have many more in the next couple of weeks and that is good for stock pickers. I'm optimistic that we might see the focus on Europe cool off and that stock picking will return to vogue, but with window-dressing pressures kicking in next week, the computers are very likely to stay busy.

Technically, we are finally trying to break out of a two-month trading range to the upside. We've done it in standard, light-volume, V-ish fashion. It isn't the best foundation, but the bulls have seasonality working for them, which may help give some support. As I wrote early this week, as long as the S&P 500 stays above the 50-day simple moving average at 1175, the technical picture has a positive bias.

Despite skepticism about Europe and the manipulated feel of much of the action, the bulls have the advantage. Window dressing should give them additional edge.

Have a great weekend. I'll see you on Monday.



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