Monday, October 24, 2011

Waiting For Europe

Despite being "technically extended" on light volume, the market continues to hold up well on optimism that a solution to the European debt crisis is forthcoming. The continued strength may actually be more a function of discouraged bears that are afraid they will continue to be squeezed rather than real buyers convinced that the worst is over, but it is keeping the uptrend intact regardless.

What seems to be driving this action again is poor positioning by bulls who never added sufficient long exposure when the market went straight back up after hitting a new annual low to start the month. There just wasn't any good dip-buying opportunity once we reversed, and so we end up with steady chasing even though the technical picture is less than ideal.

The bears will again point out that volume was light, but that seems to be almost a contrary indicator these days. Our best upside moves seem to occur on steadily declining volume, which keeps traditionalists off balance.

Also, we had positive breadth again with about 4600 gainers to just over a 1000 decliners. This tendency of stocks to move together is a function of the focus on headline news and the use of exchange-traded funds and computerized trading. Individual stock picking continues to provide little benefit in a market that is all about timing the news.

Few market players seem convinced that a solid and long-lasting European solution is forthcoming, which means the risk of a sell-the-news reaction is high. The most uncomfortable thing about this Europe-driven rally is that there has been no actual agreement or policy. All there has been is hopeful comments that something will eventual be decided upon that will be effective.

The big risk is that the market will be disappointed when Europe actually has to execute rather than just issue vague statements about how a solution is forthcoming.