A Positive Development

 | Nov 14, 2011 | 8:37 AM EST
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"The solution of every problem is another problem." --Johann Wolfgang von Goethe

On Friday, the market jumped sharply as investors anticipated that Italian Prime Minister Silvio Berlusconi would resign soon. That is exactly what happened this weekend, and now we are seeing some sell-the-news action as the focus shifts to the next step in the process, which is passing the austerity measures required for further assistance from the European Union.

Even though we have some selling this morning, it is a positive that progress is being made in Europe. Unfortunately, there is an awful lot that remains to be done and it is likely to be the primary driving force in the market for a while. I've been hopeful that we would start to see a greater focus on individual stock picking and less on headlines, but so far, there are few signs of that.

The biggest challenge of this market lately has been that stocks have been so highly correlated and so sensitive to the big picture. It's been all about trading the news out of Europe and nothing else. There has been very little to gain by trying to pick stocks that will act independently of the overall market trend. If you have misplayed market direction, good stock picking has not bailed you out. In fact, buying individual stocks was a good way to underperform the indices lately.

What has been extremely frustrating for many market players lately is that they have been bullish but underinvested, thus unable to keep pace with the overall market. Most would be better off if they simply bought an index exchange-traded fund and rode it, rather than buy stocks that deliver relative outperformance.

The big question in my mind this morning is whether we will start to see a change in the way the market trades as the situation in Europe calms down. First, we have to see if European news starts to become less important. If it does, I suspect that market players who need to make up performance before the end of the year will focus more on finding stocks that will outperform.

It is very tough to make up relative performance if all you are doing is buying the benchmark index that you are competing with. You need to be able to trade stocks that are outperforming the market if you hope to produce superior results.

At the current juncture, the S&P 500 is slightly extended and heading into some overhead resistance at the 200-day simple moving average, which is at 1272.  The overall pattern is still quite positive as we are holding the breakout of the trading range that occurred in late August. We have good support around 1220-1225. As I commented Friday, some backing and filling here would be quite healthy, as it would give us a base of support for the highs we hit following the Greece bailout.

The technical pattern and positive end of the year seasonality bode well for the bulls. If the speculative money starts to focus more on stock picking and less on headlines we could have some very good trading. A day or two of rest at this point would be quite helpful in setting the stage for more upside.

We are set for a soft open but I don't expect the bears to gain too much traction. We still have plenty of underinvested bulls and a wall of worry in place. Many market players are looking to buy a dip, and I don't expect them to be patient since they have missed out lately.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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