BAM MARKET WRAP - October 31, 2012

Halloween Fiesta

A LONG TIME PERSPECTIVE

Where we have been and where we are.  Note that the S&P is still below its highs of 2000 (over 12 years ago) and its 2007 highs (5 years ago).

Today's weakness is due to several lackluster earnings reports (Google, GE and Microsoft among others).   We'll see how deep the correction goes but we suspect we will see the recent lows around 1425 on the S&P before we get back to the recent highs. 

IT'S ALL ABOUT EARNINGS

After a month of consolidation and a slight correction, the markets are looking at earnings season to determine where it heads next.  Earnings reports have started in earnest today and will continue throughout this week with 79 companies of the S&P 500 and 12 of the Dow 30 reporting.  This is one of the peak weeks and will drive the near term direction of the market.  To this early point, earnings have been inline with expectations and the market has responded with a positive yesterday and a good start to today.  The S&P pierced its 20 day moving average last week but looks to bounce back above with a strong showing today.  Key levels to watch for the S&P are 1419-1425 on the downside and 1465 on the upside.  A break below 1419 would likely lead to a much deeper decline back into the 1300s while a break to the upside would bring into focus the 2007 S&P high of 1565.

From a technical perspective, the recent action has been constructive.  A period of decline and consolidation within an uptrend provides the market an opportunity to rest and allow those sellers an opportunity to sell in an orderly fashion.  The market is set up for another move higher if earnings can deliver.  There are many wildcards (aren't there always!) with the economy, fiscal cliff, election, Europe, etc...  The usual culprits but, nevertheless, things that could provide significant road bumps on the way to reaching the highs experienced over 5 years ago.  There remains much to keep us up at night but the market's resilience (not to mention the Fed intervention) has the market poised for more gains in the coming weeks.  We would not be surprised to see a little more weakness over the next few weeks before the market makes another charge into the end of the year.  As always, we are watching things closely and making portfolio changes as market conditions warrant.   
  

BAM MARKET WRAP - IT'S THE ECONOMY STUPID

IT'S THE ECONOMY STUPID

BAM MARKET WRAP - THREE DOWN, ONE BIG ONE TO GO

http://www.sitemason.com/newspub/fpVtLy?id=81336

SO FAR SO GOOD

The markets surged today as the European Central Bank's Mario Draghi provided enough fodder for the markets to get excited about.  While the ECB did not announce anything much different than what had already been discussed, the markets obviously liked what they heard and were pleased to see the ECB taking some action to forestall the Euro Zone crisis.  It also didn't hurt that the ADP payroll report came in much hotter than expected.  ADP reported 201,000 new jobs.  Attention will now turn to tomorrow morning's government payroll report.  The ADP report can be a harbinger of the government number but can also be significantly different.  Last months numbers were very close but in June the ADP report came in at 172,000 versus the government number of 73,000.  Needless to say, expectations have been raised for tomorrow morning.  A reading equal to the ADP number would provide support and additional fuel for today's rally.  A disappointment in the government's number could result in giving back some of today's gains. 

The rally today forged new highs for the year and broke significant resistance so the bulls will look to fight hard to keep the gains.  The German Constitutional Court meets next week and could throw a wet blanket over Draghi's comments.  The Fed is also lurking next week and the good data would make another round of easing harder to justify.  Then again, better economic data would be the best of all worlds though Fed intervention would lead to more of a sugar-rush type of gain.  Tomorrow's report takes added importance with today's solid ADP report.  Conflicting data would only make the Fed's job harder (as if it wasn't hard enough).  We'll see what tomorrow brings and will post further updates as warranted by the markets or the economic news. 

HERE IT COMES

While trading volume in August was the lowest in 5 years, September promises much more volume and volatility.   Kids are back in school and traders have taken the last of their summer vacations.  Combine that with the huge market making events over the next few days and the stage is set for  a make or break moment in this enduring Summer rally.  The key dates over the next couple of weeks are:

• September 6 - The European Central Bank meets in Frankfurt, Germany.  The markets are expecting a few more details of Mario Draghi's promise of a couple of weeks ago to do whatever it takes to save the Euro.  We'll see.
• September 7 - The August Non Farm Payrolls and Unemployment report is released.  Strength or weakness here will be evaluated to determine the likelihood of further easing by the Federal Reserve.  A weak report will likely give the Fed cover to announce more easing.  A strong report will be good for the economy and will likely preclude Fed action.  Either of these two would produce positive results for the markets.  In this case, the worst case would be a jobs report that is neither too cold or too warm - the Fed probably would not act and the markets would not get excited about the future prospects.  
• September 12 - The German Constitutional Court meets to determine the constitutionality and legality of the European Stability Mechanism (ESM).  This will be a very significant conclusion as the ESM is key to the possibility of a European solution to their debt crisis.
• September 12-13 - The Federal Reserve meets to determine if the US economy is poor enough to justify another round of quantitative easing or some other fiscal stimulus.  The announcement will come the afternoon of the 13th and it is widely expected that the Fed will act.  Any disappointment will lead to a sell-off in the markets.

As you can see, the next two weeks hold the key to the remainder of this year (maybe longer).  Hopefully, we will begin to get some clarity over the next 10 days.  Hold on - things are about to get interesting!