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I'm going to submit that we've had what might be called the "easy" moves in the market over the past two months. First there was the upbeat market action based on the anticipation of the ECB's new - and widely telegraphed - bond-buying program (which, of course, assumed that the program would actually commence one day). Then there was the run-up on the expectation of Ben Bernanke "going to infinity and beyond" with an open ended QE program. And finally, there was the pullback from an overbought market condition. Easy, easy, and easy from a market call standpoint. But from here, things might get tougher - for both teams.

Earlier in the week, when the market was doing next to nothing (ah, good times), we spent some time laying out the arguments for both the bull and bear camps. And for those keeping score at home, the bears appear to have won the latest rounds of the fight as the S&P has pulled back -2.2% over that last nine days. But from a bigger picture perspective, the bulls have been large and in charge as our heroes in horns can still brag about a gain of +14% so far in 2012.

But as I said in my opening statement, now that the "easy" moves are out of the way, it will likely get tougher from here for both sides. While the bears are feeling pretty darn good about themselves lately (it never ceases to amaze me that after being dead wrong for months at a time, how the bears will whoop it up as the S&P pulls back 2% or so), it is important to note that stocks are no longer overbought from a near-term perspective. This is noteworthy because after a decent run to the upside, most buyers know to wait until the overbought condition is "worked off" before they start nibbling at their favorite positions again.

For example, with Apple (AAPL) breaking over $700a few days back, it was tough to pull the trigger on any new purchases. Sure, the stock is still fairly valued and yes, the company is likely going to sell a gazillion iPhone5 units. But, that $700 figure likely gave more than a few investors pause. However, with AAPL now $35 lower, I pinged my trader at least twice today suggesting that now might be the time to start adding to our existing position - especially for new accounts. And let's be honest; who wouldn't love for Google (GOOG) to back up $25 or $30. The point is that after a strong run, buyers will return once prices have "come in" a bit.

And before our furry friends break out the champagne over their latest triumph (I honestly heard one bearish trader mention bubbly today in a note to clients), we should also point out that investor sentiment is starting to tank as the pullback invokes memories of the bad-old days. And then given the fact that the new Chinese government is likely to join in the central planning stimulus party before too long, the bears might (a key word) have a tougher road ahead if they expect to produce anything more than a garden variety pullback.

Of course, this is not to say the bears won't be successful in pushing the S&P back to 1420 or 1400. I'm just suggesting that from there, the bulls just might decide to say "enough already" and start to put up a fight.

On the other side of the field though, the bulls may also find the going to be a bit tougher going forward. First of all, unless the so-called leaders in Europe can get their act together and actually DO something one of these days, the bond market is going to do it for them. As such, we're going to continue to watch the yields on the Spanish 10-year on a daily basis. In short, if that yield climbs another 50 to 75 basis points, things are going to get ugly again - and fast. (By the way, if you are looking for a way to check in on the current yield of the Spanish 10-year, here's the URL to a live chart: www.forexpros.com/rates-bonds/spain-10-y...).

In addition, while everybody on the planet knows how to play the "risk on" trade (SPY, EEM, DBC, GLD, short UUP etc.) in response to QE these days, the dollar may not provide the tailwind that it has in the past. You see, with just about every central bank that matters either printing money or about to print money, the greenback isn't likely to come under the same pressure it did during the prior QE campaigns. In short, with everybody in a "race to zero" with their currency, the dollar won't drop as fast as it did during QE1 or 2. And without a falling dollar, the "risk on" trade loses some of its luster.

Then there is the earnings situation. The bottom line here is that earnings growth is slowing. In fact, according to FactSet, Wall Street is currently looking for Q3 S&P 500 EPS growth to decline by 2.7% compared to year ago levels. And StreetAccount noted Wednesday that this is down from the +1.9% growth that was expected back in July. So, unless the economy perks up or companies continue to cut costs aggressively, the bulls may not have earnings to put on their side of the ledger.

Speaking of economic growth, while we fully expect China to step on the gas once the new government takes over, if this doesn't happen in a timely fashion, then the global slowdown theme could easily become more entrenched. And if this occurs, the bulls won't be able to bank on a blue skies ahead theme.

So... while my models currently tell me that the odds still favor the bulls at the present time, I can see how both sides might have a tough time making headway from here. Therefore, with October just around the corner, this is no time to become complacent or to fall asleep at the switch.

Turning to this morning... Chinese stocks made a strong comeback overnight on the back of the PBoC injecting record amounts of liquidity into the money market system as well as expectations for additional measures to boost equities. In Europe, markets are up modestly as Spain will unveil its budget today. And here in the U.S., futures are pointing to a higher open in the early going in front of some big economic data.

On the Economic front... We'll get a bevy of reports this morning including Durable Goods, the 2nd revision to GDP, Weekly Jobless Claims, Pending Home Sales and Bloomberg's Consumer Comfort Index.

Thought for the day... The difference between the impossible and the possible lies in a man's determination. -Tommy Lasorda

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: -0.28%
    • Shanghai: +2.59%
    • Hong Kong: +1.14%
    • Japan: +0.48%
    • France: +0.68%
    • Germany: +0.43%
    • Italy: +0.68%
    • Spain: +0.48%
    • London: +0.24%
  • Crude Oil Futures: +$0.83 to $90.81
  • Gold: +$5.40 to $1759.00
  • Dollar: higher against the yen, lower vs euro and pound
  • 10-Year Bond Yield: Currently trading at 1.653%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +6.83
    • Dow Jones Industrial Average: +72
    • NASDAQ Composite: +0.33

Positions in stocks mentioned: SPY, EEM, GLD, AAPL

Source: Daily State Of The Markets: It Gets Tougher From Here