Let's Get Our Heads Out of the Sand

 | Nov 10, 2011 | 9:00 AM EST
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"Any idiot can face a crisis, it is this day-to-day living that wears you out." --Anton Chekhov

A spike in Italian bond yields Wednesday caused concern that the European debt crisis was advancing to the next stage. Market players, who became more bullish as the Greece crisis wound down, were caught by surprise, and that resulted in panic selling as stocks were dumped across the board.

This morning, a strong Italian bond auction has yields back under 7% and there is talk that a replacement for Prime Minister Silvio Berlusconi is ready to move into place. That is helping to produce yet another Europe-is-saved bounce but we have to wonder how long this one is going to stick.

One reason I maintained a sanguine attitude about Wednesday's selling was that these Europe-is-saved rallies have come like clockwork. In fact, almost any bad news is simply a setup for an immediate rebound as talk starts about what the solutions to the problems might be. There is always a meeting, an election or some sort of change that is happening soon that will fix the problem.

What is particularly frustrating for the bears is that there isn't any real progress solving the core problems in Europe. Everyone still believes that a Greek default is inevitable and that the sovereign debt problems will continue to spread. But the bulls celebrate every Band-Aid that is applied and are happy to put the real problems on the back burner as stocks jump back up in celebration of another short-term solution.

The inclination to ignore the real issues in Europe is a clear indication that there are plenty of underinvested bulls who want to rack up performance before the year ends. The huge rally in October caught folks by surprise and many missed the bulk of the move. They are now anxious to buy pullbacks and, hopefully, ride things back up for some gains.

It is a wall of worry. As we saw yesterday, there are very good reasons to be worried about Europe. But when we jump up quickly like we have this morning, those on the sidelines worry that they will miss out on the upside, so they do a little buying, which causes a rally and draws in more folks worried about being left behind. Nothing is more frustrating for bears and underinvested bulls than a market that continues to rise in the face of obvious negatives.

I believe market players will continue to embrace any good news despite the many obvious negatives that plague the market. That should give technical support, but there's still the risk of moves like yesterday's when actual bad news hits.

It will make for a choppy environment, but the seasonality at the end of the year should be more favorable for individual stock picking. One of the biggest frustrations of the market recently is the high correlation between stocks, which move in lockstep to the news headlines. Buying "good" individual stocks has provided little protection on days like Wednesday. It has been my thesis that this might change as the year winds down, but we are still so sensitive to Europe that it has been very hard to be aggressive with individual stock picking.

We have a decent bounce brewing, but all eyes will continue to be on Europe. I'll be focusing on my shopping list, but the volatility is going to force me to move incrementally.

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