Market stuck in wait-and-see mode

With a big eurozone summit starting Thursday, investors don't want to take big risks. That should change soon.

By Anthony Mirhaydari Jun 27, 2012 12:39PM

You'd be excused for dozing off. For the better part of two months, stocks have been bouncing around within a narrowing trading range. Looking at the small caps in the Russell 2000, the March-May support line near 785 is offering resistance, while the 50-day moving average is offering support. There have been a few attempts to break out, both to the upside and the downside, but no real progress.


With the global economy clearly in trouble, much of Europe already in recession and fundamentals like corporate earnings growth rolling over, there isn't much else to wait for besides new stimulus measures from policymakers or progress toward a definitive resolution in Europe. Thus all eyes are on the two-day eurozone summit starting Thursday.



I'm getting sick of writing about the eurozone crisis, and you're probably sick of reading about it. But it's what's driving the market these days, so we have to keep going.


For one, policymakers in China, the United Kingdom and the United States have already unveiled new stimulus measures, thanks to actions by their central banks. Japan, the other large economy, is a mess, mired in political bickering over a planned sales tax increase to address a runaway debt/deficit problem. So that's a no go.


Also, the real economy is really struggling.


You can see this in the way the Citigroup Economic Surprise Index, which measures how economic data are posting compared with analyst expectations, has dived to levels not seen since early last year. Earnings estimates are dropping with Q2 EPS projections for the S&P 500 down to minus 0.6% versus a gain of 6.2% in Q1. If that panned out, it would be the worst quarterly performance since the recession was ending in Q3 2009.


Even people in the corporate suites are worried. Seventy-three companies in the S&P 500 have already released negative Q2 guidance.


We also have the "fiscal cliff" problem here at home -- those tax hikes and spending cuts worth about 4% to 5% of GDP set to hit in early 2013 -- that will be a big issue soon.


But right now, with Spanish and Italian borrowing costs nearing unsustainable territory and with the new Greek government demanding concessions on the strict budget austerity requirements imposed on it as part of its bailout agreement, action is needed.


Global policymakers are practically begging Germany to interrupt the austerity, weak economy, weak banks, deeper deficits, more austerity death spiral it keeps pushing. I think it eventually will, since the costs of killing or exiting the eurozone are still higher than rescuing its neighbors.


I've been using the flat spot in the markets to harvest profits and raise some cash, getting "flat risk" with a big, unpredictable political event coming up. Also, I'm no longer getting strong directional signals from the overall market. And no sector or industry groups are breaking out in a big way. There's only some lingering strength in biotech and semiconductors and some emerging strength in financials.


It seems many are pulling in their horns. Newsletter writers have reached a level of neutrality (based on survey data) that hasn't been seen since 1983, according to the folks at Sundial Capital Research. Historically, such neutrality was resolved to the upside. Out of eight precedents of neutrality on the scale we're seeing now, the S&P 500 traded higher 1-3 months out seven times. Four months out, there was a positive return all eight times with an average gain of nearly 7%.


This fits with my overall thesis that we're headed for a quick multimonth rally before America's looming fiscal cliff and other issues create market weakness later this year.

Trading update

Existing Edge Letter Sample Portfolio positions continue to perform well. Spectrum Pharmaceuticals (SPPI) is up nearly 18% since I added it on June 15. I am adding one new financial position to my holdings: Synovus Financial (SNV).


Disclosure: Anthony has recommended SNV to his newsletter subscribers.


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

Jun 27, 2012 4:57PM
Anthony the truth is that this stock market is no longer being driven by true corporate earnings and their ability to grow their business by selling more goods and or services.  Instead, it is manipulated daily by hedge fund managers and other financial traders who are just playing with investors retirement funds for their own personal gain.  Contrary to what the "experts' want you to believe, the truth is that the housing market is in the tank and so for the media to report how great things are is nothing more than a feeble attempt to make people think that things are better than they really are.  Home prices may be rising but when your in the toilet there really is no where to go but up.  However, the majority of houses being sold today are bank owned properties and they are selling at deep discounts.  The job market is in the tank and those jobs being created are lower paying jobs for the retail and service sector.  We are averaging less than 100,000 jobs per month where we need to be creating over 500,000.  Finally out unemployment rate is being reported as around 8% but the reality it is closer to 15% when you take into consideration those people who are no longer elgible for benefits.  So before everyone gets too "giddy" over the economy the truth is it still sucks and I have long stopped listening to the "experts" and our gov and their self-serving agendas. We have an economy built on a foundation of straw and mud along with a great deal of "Hype & Hope". I just wish our gov would tell the truth but they never have so why should they start now?
Jun 27, 2012 3:28PM
What happened to the stock market being a long-term investment?   This "day-trade" mentality is insanity!
Jun 27, 2012 3:16PM
Follow the big money, which isn't playing. Alot of people, myself included, are taking insurance out on the inevitable devaluation of the US dollar with precious metals. It is a better bet than the stock market casino. IMO they will kick the can for a few more years...if we are lucky. I am out til at least after the election.
Jun 27, 2012 2:05PM
This rocky market just keeps getting rockier and the potholes get bigger.  You just long for the good old days.
Jun 27, 2012 5:05PM
This market is being falsely propped up by Hype, Hope, Lies, Manipulation and a infusion of funny money.  Why would anybody put their money in this carnival side show is beyond me. 
Jun 27, 2012 1:50PM
I hope there is no emerging strength in financials because nothing has changed for them and they could bring the economy again on its knees, haha, without the necessary changes in the industry.
Jun 27, 2012 3:06PM

"You can see this in the way the Citigroup Economic Surprise Index, which measures how economic data are posting compared with analyst expectations, has dived to levels not seen since early last year."


I can no longer get a quote for CESIUSD on Bloomberg.  Is there another way to see the chart?



"Earnings estimates are dropping with Q2 EPS projections for the S&P 500 down to minus 0.6% versus a gain of 6.2% in Q1."


Apple alone has shown that its earnings are so large, coupled with analysts who habitually underestimate it, that it is able to swing the entire index to earnings growth.  You and other authors were even reduced to reporting "S&P earnings minus Apple" in the past.  It'll happen again.


Earnings growth will continue.

Jun 27, 2012 8:40PM
Anthony don't you think it would have been better if Greece just got out of the EEC? Sure market crashes would result but they would rise again. I bet Merkel would very quickly rethink the entire EEC which lacks leadership, direction, unity, not to mention a central bank. The Greeks will ask for more and Merkel will refuse and this circus continues. I say let Greece go then pick up the pieces and put some real policies in place, a central bank selling eurobonds. Now, Merkel is rightly afraid the PIIGS will continue to overspend, but when the EEC was formed they had rules that no country debt exceed 60% GDP, so stick to the rules and kick out countries that fail. Mind you Merkel should note that Germany is also in that category.
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