The ECB Knows What To Do, But When Will They Do It?

by: Marc Chaikin

The ECB Knows What to do, But When Will They do it?

The U.S. stock markets made a stand at the critical support zone between 1,280 and 1,300, finishing at 1,320.58 up 2% on the week for the S&P500 Index. The pattern of notably weak closes every day, which was very disturbing, was reversed as we saw markets rally in the final hour the past four days.

This is meaningful for two reasons:

1) Buyers are comfortable adding to positions in the 1,280 - 1,300 support area.

2) There is more confidence that the ECB and European Prime Ministers will take the necessary steps to prop up weak central and commercial banks, to help alleviate concerns over sovereign debt and sagging economic statistics.

What to Look for Now

After a series of high level conferences between G-8 leaders, NATO and the European heads of state, there are a generally agreed upon set of measures that could be undertaken to prop up European sovereign debt and stimulate economic growth.

These include loans to prop up the faltering Greek commercial banks, a eurobond debt instrument to stabilize and consolidate sovereign debt and a more aggressive fiscal stimulus plan to get their economies moving in the right direction.

All of these moves are politically controversial and the public debate amongst European leaders has caused the stock market to become increasingly volatile on an intra-day and overnight basis in response to the shifting winds of the public debate.

It's a Question of If and When

There are three outcomes which U.S. investors should consider and they result in vastly different outcomes.

1) The ECB does nothing and lets this crisis fester. This leads to contagion with the U.S. economy suffering from continued economic contraction in Europe. In this scenario everyone loses including U.S. investors.

2) European leaders eventually do the right thing but drag out the political drama to satisfy their constituents at home while world markets sink below current support levels. This is what has been playing out in the markets the past two weeks and leads to the conclusion that for equity investors here and abroad the U.S. markets are the surest game in town.

3) Europe acts decisively with bold initiatives to stem the liquidity issues which have plagued the sovereign debt markets and stimulate the European economies. Recent comments from leaders in France and Italy support this outcome but Merkel and Germany need to climb aboard. Under this scenario U.S. stocks are the most attractive investment vehicles, with our slow growth +2-3% economy leading the U.S. markets to new highs later in 2012.

With our stock market dependent on hard political, fiscal and monetary decisions in Europe it is difficult to say with any degree of certainty when and if stocks will move higher.

What we can say with confidence is that avoiding stocks with bearish ratings (see my rating methodology) like NetApp (NASDAQ:NTAP) and Veriphone (NYSE:PAY) will save you grief and money. Both these stocks gapped down dramatically this week after reporting disappointing results or lowering future earnings guidance.

On the other hand stocks like Petsmart (NASDAQ:PETM) and eBay (NASDAQ:EBAY), with bullish Power Gauges, provide upside surprises even in this uncertain market climate.

To view a rating, enter a symbol:

And finally, a lump of coal which never made it into your Christmas stocking.

Since February our Industry Group Reports, which are part of this Market Commentary, have highlighted Coal Stocks as weak with bearish Power Gauge Ratings and a group to be avoided. These stocks have dropped more than --25% on average since we began flagging them … and they are still underperforming the market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.