The market is on the cusp of change, or so it seems to me. Just think back to last year at this time and if you can, think back to the year before that. The undercurrent of fear that is always underneath the market flow rose to the top and sent the market tumbling, Last year, the Japanese disaster, the spike in oil prices, the rise in food prices, the revolts in numerous Middle Eastern countries, and the embarrassing debt debate in the halls of the US Congress sent the market reeling. The year before that, Greece, the European debt issues, and a general concern about the US economy knocked the market down. This year, here we are just entering May and the market is weathering the bad news, responding well to corporate earnings, and in general showing signs of imminent strength. This is a different market and even though it is jittery, it is not panicked.
Another point to consider is in each of the past two years, the market defied doomsayers and false prophets, rising from the ashes of spring and summer only to fly high right through the fall and early winter. Today, the market is sitting near levels not seen since 2008, and this after weathering biting sell-offs based on nothing more than worry about the future actions of the Fed and some new found fears about Europe, specifically Spain, the new whipping post for the doomsayers and false prophets.
The market is on the cusp of change, but what that will be is uncertain in my mind. I don’t believe Spain will take the market down, and it appears the worries about China’s economy are receding. The US economy, although staggering here and there a bit, is still moving forward. Iran and the general issue of high oil prices is looming, but that appears stable at the moment. No, the one catalyst that could send the market reeling are the economic numbers out of Europe.
Euro zone factory activity contracted again last month, with the purchasing managers index, seen as a measure of how the economy will fare, falling to its lowest level since June 2009.
Despite the fractured syntax above, the sentence does point to a real potential problem for the market. If Europe cannot arrest the economic decline brought on by the loss of confidence in its overall fiscal state, the economic recoveries in both the US and China could be seriously damaged. The market will not react kindly to another global recession.
In my mind, though, I see Europe recovering from its current economic downturn. The reason will be a return of confidence from investors, businesses, and consumers. I believe this will happen when the issues surrounding Spain and Italy are put to rest. It will take some doing, but if investors start to believe in the huge financial backstop that is now in place, bond yields in those countries will drop, making it easier to find reinvestment money for their ailing economies. It is clear to me this is the final piece of the ongoing resolution process to the debt issues in Europe.
The fact that the market has not run from the current state of affairs in the world suggests it too sees potential in the global economy and my guess is big money is biding its time, not wanting be out of the market and not wanting to be totally in. This is the cusp upon which the market sits. It is a precarious point and it will go one way or the other before too long because the market is not very good at balancing itself. All it will take is the weight of a bit more money added or the loss of weight from money subtracted. So, keep your eye on leading indicators from Europe, and those will help determine which way things will go.
Trade in the day; Invest in your life …
