Can the Market Ignore Europe?

 | Dec 12, 2011 | 8:48 AM EST
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We experience moments absolutely free from worry. These brief respites are called panic.

-- Cullen Hightower

For months now, the pattern of action in the market is that it rallies sharply on news that Europe has found some solutions to its problems but then sells off as skepticism and doubt creep back in. After it sells off for a while and market players become increasingly nervous, we see more "Europe is saved" news and repeat the cycle once again.

The heart of the problem is that no one really is convinced that Europe is going to be saved, so every spike and every rally is eventually sold. The upside can come very hard and very quickly, which prevents the bears from being too comfortable, but ultimately, the truth about the depth of the issues in Euroland prevents market players from being very confident.

Last Thursday, the market was surprised when the European Central Bank (ECB) didn't come up with the standard rescue. But on Friday, an intergovernmental treaty that imposed tough austerity measures was hailed as the latest step forward. Already this morning, the pessimism about that solution is rebuilding and the market is setting up for a soft open.

It doesn't look as though the market's intense focus on Europe is going to end any time soon but the big question for us at this point is whether we might see a temporary respite. Can we ignore Europe long enough for a little end of the year rally?

There are only 14 trading days left in 2011 and many market players are anxious for some better trading after what has been a very tough year. The indices are around flat for 2011 but there is no shortage of fund managers who are lagging and are in desperate need of some relative performance.

What it really boils down to is whether we can shift the focus to stock picking and forget some of the macro-economic issues for a while. One of the most challenging aspects of the market recently has been the very high correlation between stocks as they all dance in tandem to the news flow. There has been very little reward for individual stock picking. If you have wanted to produce returns, you have had to focus on playing market direction, which has been particularly tricky as the vast majority of movement occurs overnight and we see big gaps every morning.

The market is reacting to Europe again this morning and we'll have to see if we can shake that off after the open. There are plenty of interesting charts and the potential for some good movement, but this focus on Europe has to lessen for them to work.

I am a bit concerned about some of the earnings warnings we saw last week. Even without Europe, there are plenty of economic headwinds in the U.S. as well. But so many market players have been out of step with this market for so long it wouldn't take much to produce a decent run if Europe goes to sleep for a little while. With end-of-the-year vacations occurring, there is some hope for that.

We'll see if the Monday morning dip-buyers step up. They almost always will give it a try to start the week. Market players are very anxious for some sort of Santa Claus rally to wrap up a tough year. Can they ignore Europe long enough to make it happen? I'm looking for a pretty good try.

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