State of the Market 10/10/2011

The market has been on quite a tear over the last few days as there seems to be progress being made in Europe.  The powers that be have rightfully began to realize that the best way to contain this mess is to assure that the banks who are holding the debt of the countries in a bind are properly capitalized.

Although Europe has been the 900 lb gorilla in the room, there are other factors which are now beginning to show that the recession that the market has been discounting as of late may not be as evident as originally thought.  When looking at the economic numbers, one does not see recession screaming out at him.  Over the last few weeks the economic numbers have been coming in above expectations.  These numbers include results on retail sales, employment, inflation, and housing.

In addition to this, today in the WSJ the sovereign wealth fund of China began buying the shares of the 4 largest banks of the nation showing that the government is looking to instill confidence that the market is safe to invest in.  China has had a tough year this year but over the last week or so the ETF which tracks the Chinese stock market (FXI) has began to show signs of life.

So does this mean that we are in the clear.  No, the gridlock in governments on both sides of the pond will be enough to keep the anchor on the world economy.  The key to prosperity is jobs and this issue has not been properly addressed by the people running governments around the world.  The destruction of jobs and skills that austerity measures have created will take years to overcome.  However with interest rates as low as they are, and with each passing day the mess called the housing market getting closer and closer to finally getting out of the mud one can hold some optimism.

The long term indicator that we have created and follow on a daily basis has been slowly rising going from solidly in bear market territory to its current location in the neutral part of the index.  This indicator tracks everything from Fed actions, to fiscal policy, to technical analysis, and sentiment indicators and it is showing that although things are still tough out there the factors which affect the market are very slowly turning from having restrictive affects on the market to having progressive ones.

One more thing which can be a powder keg in either direction for the market are upcoming earnings.  Third quarter earnings results begin tomorrow with Alcoa.  Since the end of quarter two results earnings estimates have been reduced to levels not even seen in 2008 when the economy was crapping itself.  With the expectations bar set so low and with economic numbers coming in better than expected one has to wonder if the odds of better than expected results are around the corner.

One can hope.