Daily State Of The Markets: Does Spain Trump Earnings, Fiscal Cliff, Etc.?

Includes: DIA, SPY
by: David Moenning

Good morning. After 21 days in which the intraday stock market action was just plain lousy, the bulls appear to have found their long lost mojo this week. While there is no telling whether or not the current joyride to the upside will bump its head on the top end of the trading range in another 15 S&P points, it has been a relief to see stocks not succumb to relentless intraday selling this week. But what is interesting is the reason behind the rally seems to be trumping all of those worries that we'd heard so much about over the past three and one-half weeks.

If you will recall, the bears had been carping incessantly about the fact that earnings were going to see negative growth for the first time since 2009, that China was in for a hard landing, that the Fiscal Cliff was going to doom the U.S. to recession in the first quarter of 2013, and that Europe was going to continue to be a noose around the global economy's neck.

And yet, after a nearly month-long corrective phase, the DJIA closed Tuesday just 60 points from its most recent bull-market high and the S&P 500 needs to gain just +0.75% to make a new high water mark for this bull market. And yes, it is true that the NASDAQ, the Smallcaps and the Midcaps have quite a bit of work to do in order to catch up to the blue-chip indices and all remain in downtrends. However, the key point is that the situation in Europe just might be trumping all of those worries the bears have been yammering on about.

Before I continue, let me state clearly that I believe the jury is still out on whether or not the bulls can "get it done" and breakout to the upside. The bottom line is that as a "trend guy" I've got to call the current market environment a consolidation or corrective phase until proven otherwise. This would require a meaningful close on the Dow above 13,625 and a move over 1470 on the S&P 500.

However, as I have observed recently, up until Monday, the intraday action had been pretty lousy. Just about each and every intraday advance was met with a series of sell programs and as such, the prognosticators told us this did not bode well going forward. But a couple of funny things happened on the way to the wipeout this week. First, the data out of China wasn't as dour as had been feared. It appears that the Chinese economy might be able to muddle along with a growth rate around 7.0% - 7.5%, which is hardly the stuff of catastrophes. Second, and more importantly, it appears that the EU and Spain have come to an agreement and as such, it doesn't look like the eurozone is going to implode this year after all.

What is especially interesting to me though is the fact that the high profile earnings reports released recently haven't exactly been barn burners. Once again we're seeing the companies beating the bottom line EPS estimates, but continuing to come up short on the revenue side and/or not saying great things about the future. Frankly, as someone who is currently long the stock market, I have cringed when several of these reports have hit the tape. I assumed that these reports would simply add fuel to the bear argument, the sell programs would become more intense, and that the Dow and S&P might play catch up with the the likes of the NASDAQ to the downside.

But this has clearly not been the case as word over the weekend that Spain will likely ask for assistance in November seemed to cause the shorts to back off. Then Tuesday's news was that Spain wouldn't be seeking a full-fledged bailout, but rather a line of credit - and that the EU would not impose any further conditions or austerity measures. Just like that, the negative intraday action stopped and stocks were off to the races once again. Thus, it appears to me that Spain may indeed be trumping the earnings, the fiscal cliff, etc. at this time.

So, will this the feel-good attitude about Spain NOT reigniting the European debt crisis last? Will the earnings season continue to come in punk? Will the powers-that-be in Washington actually do something about the fiscal cliff before January? I am sorry to say that my crystal ball remains in the shop and I don't have any answers. But again, for now anyway, Spain appears to be the key. Stay tuned though because on Wall Street, the focus can change at the drop of a new algorithm.

Turning to this morning ... Earnings from Intel and IBM are pushing Dow and NASDAQ futures lower in the early going. However, a Moody's report saying that Spain will not be downgraded to junk is keeping European markets and S&P futures buoyant.

On the Economic front ... We'll get the report on Housing Starts and Building Permits this morning.

Thought for the day ... Entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States. -Ronald Reagan

Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell ...
  • Major Foreign Markets:
    • Shanghai: +0.34%
    • Hong Kong: +0.99%
    • Japan: +1.21%
    • France: +0.29%
    • Germany: +0.16%
    • Italy: +1.09%
    • Spain: +1.56%
    • London: +0.50%
  • Crude Oil Futures: +$0.18 to $92.27
  • Gold: +5.60 to $1751.90
  • Dollar: lower against the yen and pound, higher vs. euro
  • 10-Year Bond Yield: Currently trading at 1.692%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +2.53
    • Dow Jones Industrial Average: -22
    • NASDAQ Composite: -9.88
Positions in stocks mentioned: none