- Market shakes off more European problems and turns positive, but this time it cannot hold the move as ECB efforts are not turning the tide.
- Dominoes falling in Europe?
- Fitch states the obvious during the afternoon session and the market says ‘enough,’ at least for the day.
- Mixed retail earnings causing some cracks in the market strength.
- CPI falls for the first time in four months as gasoline prices decline.
- Production and capacity continue their rise.
- Job cuts still coming in the financial sector.
- After hours earnings not helping the mood for Thursday as indices try to hang onto their nifty little consolidations.
- Longer term outlook versus the nearer term.

US stocks again fight back against European troubles, but late selling pushes them lower.

Once again the session started to the weak side with futures negative. Once again, however, futures were on the mend ahead of the bell, and by mid-afternoon the indices were cracking positive. Three days in a row US investors and traders had to deal with European issues and it looked as if for the third day straight they would come out decently, i.e. still building on some pretty nice consolidations to set up yet another break higher. As I have said before, this move is not going to be a sprint, but a tortoise climb toward the end of the year with the indices shaking off bad news from Europe along the way.

No doubt Europe was doling out the bad news again. The Bank of England posted the ‘you don’t say’ story of the morning, stating that if Europe fails to resolve its issues the global economy would be hurt. You don’t say. Were the Brits compelled to state the obvious to try and show they still could keep the stiff upper lip or was this a threat/plea to the rest of the world that Europe is in it deep and needs some help or else everyone is going to feel the pain. Believe me Europe, while we may not be in the perilous position you are in just right now, we are in it deep as well. Or perhaps it was just the BOE’s attempt at humor; I must confess that I, as with many Americans, don’t always get the British sense of humor.

Then there were the real worries outside of the BOE’s release. Italy’s largest bank asked the ECB to widen the collateral requirement range. Never a good sign as it indicates difficulty in obtaining the necessary funds to operate. With Dollar/LIBOR steadily ticking higher (where again is that ‘deal’ that was struck a couple of weeks back?) it is clear that anxiety is growing among the financial institutions as to which ones will survive just as was the case in 2008. Not nearly at that level yet, but even with the ‘deal’ in place LIBOR keeps rising. Again, that tells you the financial institutions are looking at each other suspiciously, wondering who will fold.

Italy’s 10 year bond yields are back over 7%. Spain yields closed at 6.44%, surging toward that 7% level. If they get there you have two of the bigger PIIGS with unsustainable rates. France is not surging to 7%, but its bonds spreads vis- -vis Germany’s bund are widening dramatically. Widening spreads show concern increasing with respect to their soundness. Greece is relatively small potatoes. Italy’s economy is big. Spain’s economy is big. France is the EU’s second largest economy. Worrisome stuff. Ireland adopted austerity, wages have declined, the economy has declined as well, but this is what Germany did a few years back and look where it is today, the lone strength in the EU. Yes it is a hard thing to swallow, but piling more debt upon huge debt destroys the currency and pushes inflation. History says it does not solve the problem but only exacerbates the issue before things collapse.

So, it is no wonder US markets were worried and started the day lower. But as noted they were on the comeback trail into the afternoon. A -0.1% CPI, the first decline in four months, took the heat off worries of inflation. The core rose 0.1% as expected, putting the year over year core growing at 2.1%. The overall CPI fell thanks to a 3.1% decline in gasoline prices. The worry is the spike in oil prices, WTI is now over 102/bbl, will jump gasoline prices just in time for Christmas. Nice lump of coal in the stocking so to speak.

US earnings were not bad but mixed. TYC beat handily. ANF in retail missed handily. How can that be with such a strong consumer? Just an outlier right? We will see. Industrial Production (0.7% versus 0.4% expected) and Capacity Utilization (77.8 versus 77.7 expected) both posted nice advances. Again the US data continues to show improvement in October as it did in September.

That appeared to be enough to offset the news out of Europe for the third session. Stocks turned from negative to positive mid-afternoon and were on the climb. Then Fitch came out with the second ‘duh’ statement of the session: Unless the EU debt crisis is resolved timely and orderly, the US bank crisis could worsen. That is the same as saying if one of your four milk cows dies on your dairy farm things could be financially worse for you. No kidding.

Despite Fitch basically stating the obvious, it was enough to derail stocks. They turned over hard and sold into the last hour. Tried to bounce with 30 minutes left but that was tossed right back. Losses across the board, and they got a bit hairy at the close.

SP500 -1.66%. NASDAQ -1.73%. DJ30 -1.58%. SP600 -1.83%. SOX -0.59%.

That left SP500 below its 20 day EMA and heading toward last week’s low and the rising 50 day EMA, not to mention the top of the August/October trading range. Same on NASDAQ. Not in bad shape, just not in as great shape as they were Monday and Tuesday. Indeed, once again the indices had to deal with bad news from Europe, but unlike early November and again the second week of November, no 3+% plunges on the news.

Some important economic data on tap, e.g. initial jobless claims and the November Philly Fed. New York edged back to positive and Philly is expected to stay positive though lower overall. Manufacturing, as you know, is key as it led the recovery, led the backsliding, and is trying to keep things from falling off the cliff yet again.

Earnings are still coming in and after hours AMAT announced a disappointing outlook. Seems as if a broad swath of companies from many different sectors are doubtful about the future, but for some reason many are saying things are solid for the US in 2012.

My view is that the rally can make it through the holidays but then it is problematical. Many stocks are in position to move higher in the near term what with their rounded bottoms and rebounds, now showing nice flag tests. After a near term move higher, however, it is not so clear. Many show large rounded tops that led to the decline that presaged this more recent bounce. Before that there was a lower high and now many stocks are moving up to test that interim high that preceded the peak on the rally. That is forming, as you have likely surmised, potential head and shoulders patterns. Big ones.

Thus my view things turn more problematical after any move into year end. There will either be a big breakout upside that will signal the US economy is pulling out of the dumps and will have a good 2012, or there is a big breakdown coming that bodes poorly for the economy in 2012. It could catch many blindsided who view the recent increase in the economic data a sustainable recovery. That could be the case but at this stage the data is not telling us a turn has occurred. I also have my doubts about the data; strange things happen in the year leading up to an election.

The bond market is rallying and that is not a great indicator for the economy, but the yield curve is fine (thanks to the Fed holding the short end down) and the money from Europe is distorting its action. As seen with the crude goods reading in the PPI on Tuesday, there may even be deflation ahead. With all of the money printing that there could be deflation is downright worrisome. Of course if there is no money velocity (turnover through lending, etc.) then there are no inflationary pressures; once that turns, however, inflation is an issue. In the interim, if things are bad enough you can get deflation. Worrisome stuff indeed.

For now, however, the theme still appears to be upside despite days such as Wednesday that seem to snatch defeat from the jaws of victory just as in late October and early November. As noted earlier and on Tuesday, however, though lower, the losses were mere shadows of the declines seen earlier when this kind of news regarding Europe hit. That still bodes well for continued upside on the current move, slow though it may be.

One worrisome point is the cracking in some leaders, e.g. AAPL, ANF; we see downside plays in some stocks even as many stocks and the market overall look to continue their setup for more upside. That plays into the notion that the market gives some more upside through the holidays, but is hampered by the selling in some early leaders, ultimately leading to a market fall as the new year begins.

That all remains to be seen. For now we do what we do: look at great patterns up and down, and if they show us the moves we want we take advantage of them and pick up positions, taking what the market gives here at the year end.