ETF Periscope: Preoccupied Wall Street
“When we remember we are all mad, the mysteries disappear and life stands explained.” — Mark Twain
It is not just that the various markets have fluctuated at high velocity during the last several months. It’s also because the main focus of its attention has shifted back and forth across the Atlantic Ocean at an equally frenetic pace.
The ongoing drama of Europe’s sovereign debt crisis has alternately shared the stage with the anemic state of the U.S. economy. The occasional good news out of Europe seems to get immediately negated by poor economic reports out of Washington. Likewise, any infrequent positive sign of economic life on the domestic front seems to get shot down quickly by new complications from out of the EU, such as the concerns that the debt crisis has morphed into a full-fledged banking crisis.
This back and forth, up-and-down cycle has translated into a sideways market, with up-trends being nipped in the bud and downtrends somehow halted right before a crash seems imminent.
If you look at last week’s market action, it seems like some progress towards the upside has been made. The Dow Jones Industrial Average (DJIA) ended the week up 1.7%, the benchmark S&P 500 (SPX) gained over 2% during the same period, and the Nasdaq Composite Index (COMP) topped them both, ending the week up 2.7%.
On the other hand, all that upwards action merely got the equity market pretty much back to where it was two months ago.
The sideways trend may be about to shift. Here are two reasons a breakout move may soon be in the works.
Over the weekend, Germany’s Chancellor and France’s President once again got together to discuss the EU debt crisis, perhaps over beer and croissants or perhaps wine and pretzels. And, as happened just a few short weeks back and likely to the surprise of no one, the leaders of the eurozone’s two largest economies announced that they “are determined to do what’s necessary to ensure the recapitalization of Europe’s banks.”
Investors will likely find out what that might entail after EU’s leaders meet in Brussels next week. If Wall Street believes that the EU can get a grip on the debt and banking crisis, then some of the underlying uncertainty will be erased, and stocks may be viewed through the “oversold” prism, which could result in a big round of buying.
On the other hand, if investors think the EU leaders are once more kicking the can down the road, then new lows on the year could become a reality, and fast.
On the domestic front, Q3 earnings reports are ready to roll in, and there is almost nothing that makes Wall Street go on a buying binge quicker than a few key indicators of corporate health. Key sectors will be represented in the first wave of reports, with Banking, Technology and Manufacturing represented, respectively, by J.P. Morgan (JPM), Google (GOOG), and Alcoa (AA).
Should the first wave of U.S. earnings reports be positive and the EU news regarded in similar light, then the sentiment of uncertainty may be addressed, and the market may gain some strong upward traction.
The obvious flipside to that is bad earnings coupled with unconvincing EU solutions. If both of those were to occur, then a downtrend is predictable—and may run all the way into the New Year.
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
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