Do not seek to have events happen as you want them to, but instead want them to happen as they do happen, and your life will go well.
The question for market players to ponder this week is if we can build on a move of over 450 Dow points that was triggered by some vague comments from a European banker. The market was technically set up to break down until Mario Draghi announced his intentions to do whatever is needed to help preserve and protect the European Union (EU).
We have heard that talk from central bankers quite often during the past year -- and Europe is still faced with major problems -- but the market celebrates each and every time they make more of these promises to fix all the issues. Being skeptical of easy solutions certainly seems justified, but it has been a major mistake from a trading standpoint.
What is particularly interesting this week is that the big move comes in front of three major news events. First, the Federal Open Market Committee (FOMC) will be making it interesting rate decision on Wednesday at 2.15 pm EDT. There has been much chatter lately, in large part due to a Wall Street Journal article, that the Fed is ready to start QE3. While some say it is still too early and more data is needed, there is a high level of expectation that something will be forthcoming.
The second big event this week is a meeting of the European Central Bank ECB on Thursday. ECB President Draghi has essentially promised that some moves will be made soon to shore up the sovereign debt issue and expectations will be high for some actual policy decisions.
The third event that will impact us this week is the July jobs data release on Friday. If the Fed doesn't act on Wednesday, another weak report may be the nudge that does cause them to move. The report will have political and economic ramifications.
In addition to these three major news events, there is also a full docket of earnings reports and a variety of economic statistics to consider. From a macro standpoint, there are plenty of potential catalysts, so we are likely to see some big gaps in the morning as the news unfolds.
Trying to anticipate the macro news flow is always a challenge, but what makes it even more challenging is that the big bounce to end the week has left the market a bit overbought. It went from the verge of a breakdown to the highest level since early May. Now it is up to the bulls to build on this momentum further.
Adding some confusion to the picture is that despite the euphoric response to Draghi's comments, earnings have been a mixed bag. We have seen some major strength in names like Amazon (AMZN) and Expedia (EXPE) but we have some disappointments in key names like Apple (AAPL) and Starbucks (SBUX). It has not been a particularly stellar earnings season; the macro matters are driving the action.
The market's recent lesson for us has been that we need to be ready for sudden shifts in sentiment. We went from despair to celebration on questionable news last week and if you fought the shift, you missed out. The action could easily shift back again, but there is a strong tendency for this market to squeeze the skeptics -- especially when the central bankers are jawboning.
We are set for a fairly flat open this morning and a battle between profit-taking and a further squeeze. There were many market players out of position last week and they helped to boost this market but as it has become more extended, the pressure to chase will soften.
My game plan is to stay highly reactive because there is no way to predict how these major macro events will play out. If the Fed and the ECB coordinate action, the bears will likely get crushed, but the chances of a disappointment are extremely high. It is going to be an important week of action.