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On June 4th, the Dow Jones Industrial Average (NYSEARCA:DIA) flirted with the 12,000 level, hitting a low just 4 points off that critical number. Since that point, in just a matter of two weeks, the index is up more than 830 points, a rise of nearly 7%. The S&P 500 (NYSEARCA:SPY) has performed even better, up 7.2% over that time period. It has been a nice rally, but are we getting ahead of ourselves, or perhaps relying too much on the hope of the Federal Reserve? Let's examine where things stand and figure out if this is just smoke and mirrors.

United States:

Most of the rally has been on speculation of a possible QE3 from the Federal Reserve as it meets this week. Can the Fed really do much more at this point, and if so, will it actually work?

First, let's look at the weekly jobless claims. After a brief drop in late April, weekly claims have risen again, and another bad week or two could put them near the 400K level again. I put together the following chart showing how claims have risen over the past two months, using the actually reported number that week. The past three monthly employment reports have disappointed greatly, and if the weekly claims stay high, a fourth straight miss could be likely.

Other data has not been very good either. Michigan Sentiment for June fell to 74.1 from 79.3 in the prior month, well below expectations for 77. Retail sales, excluding autos, fell 0.4% against expectations to be flat. Also, the previous month's numbers, both including and excluding autos, were revised downward. Industrial Production was down 0.1%, when it was expected to be up 0.1%. Factory orders also missed recently, and productivity declined more than expected.

Earnings Not Tremendous:

A few recent earnings reports also show signs of trouble.

Despite beating on the previous quarter slightly, Oracle (NYSE:ORCL) guided to revenues that were well below street expectations for fiscal Q1, even saying that revenues might decline year over year. Earnings guidance was just in line. The company did announce a larger stock buyback, but also had a key executive leave the company.

FedEx (NYSE:FDX) reported earnings that beat expectations, but revenues were in line, and even below some expectations. Shares shook off early morning weakness to rise 2.8%, but one must wonder why. The company guided to Q1 earnings per share of $1.45 to $1.60, against analyst estimates for $1.70. Guidance for the full fiscal year (ending next May) came in a range of $6.90 to $7.40, with analyst estimates at $7.39. Both numbers were well below expectations.

After the bell on Wednesday, Adobe Systems (NASDAQ:ADBE) reported revenues and earnings slightly ahead of expectations. However, the company guided to fiscal Q3 revenues of $1.075 billion to $1.125 billion, below the $1.13 billion currently expected. Earnings per share are expected in a range of $0.56 to $0.61, against estimates for $0.61. Adobe expects full year revenues (year ending November) to rise 6% to 7%, roughly in-line with 6.6% estimates, and EPS of $2.40 to $2.46 against expectations of $2.44. The company cited Euro weakness for the conservative guidance.

Also after the bell, Jabil Circuit (NYSE:JBL) reported earnings that were in-line, but the company missed on revenues. The company also gave much weaker than expected guidance. Revenues are forecast to be $4.10 to $4.35 billion, whereas analysts expect $4.37 billion. Earnings per share guidance of $0.54 to $0.66 was a bit below the $0.64 expectation for fiscal Q4.

We are less than two weeks from the end of the calendar quarter. That means we are roughly one month away from the heart of earnings season. The above mentioned reports were not great, even though some of the names seemed to rise on the news. Weakness in Europe seems to be a common thread, and that could cause a number of negative pre-announcements.

Europe:

German business sentiment declined sharply in a report out on Tuesday, and although a Spanish bond auction went alright, Spanish 10-year yields are still above 7 percent. Elections seemed to have gone well over the weekend, but does that really mean anything? We thought problems were solved at this time last year. Guess what, they weren't. Things have gotten worse, and does anyone really think problems will be solved anytime soon? I don't.

Conclusion - Fed, Fed, Fed:

The Dow has risen more than 800 points off its recent low, and the S&P 500 has fared slightly better. However, US economic data has not been that great recently, and jobs data going forward will be crucial. Some selective earnings report have been mixed, with companies providing guidance below expectations. Europe seems fine for now, but we seem to approach that point every few weeks. Then things get worse again, and the market drops.

But for now, all eyes are on the Federal Reserve. Should the Fed announce QE3, the rally should be able to sustain itself. But should the Fed disappoint, I wouldn't be surprised if we lost at least half of these gains in the next 7-10 days. There's only so much the Fed can do, and that might not even be enough.

Source: Another Smoke And Mirrors Rally?