European Optimism or Pessimism. Pick One Soon Please
The market was trounced yesterday. The bipolar nature of the market continued and the indices were crushed as investors cited "uncertainty in Europe" for the decline.
Really? Uncertainty in Europe?
Maybe I am in the tiny minority, but I am dog tired of Europe. Every day it seems like "market rises on European optimism" or "stocks fall as Europe debt crisis grows" is front page news.
Mentally, it's tiring to read completely opposing articles on the same subject matter every other day.
Yesterday stocks fell on "European pessimism" and that's after stocks rose Friday on "European optimism." But nothing happened over the weekend to change Friday's viewpoint.
The decline yesterday was fast and furious. All indices were slammed lower yesterday and most of them declined by 1.2%. The noticeable loser was the financials, which were dinged for 2.6% on the session.
A minor pullback was to be expected across the board yesterday after Friday's big push higher, but the decline should not have been quite so severe. The bulls need to regroup quickly if they are to rally the indices higher in the final three weeks of the year.
The real culprit of yesterday's decline was the euro, which fell by nearly 2%. When the euro declines the dollar rises, and generally speaking a rising dollar has a negative impact on stocks and commodities. The euro is extremely oversold and I would expect to see a brief recovery today.
The recovery in the euro will help the market. But if the euro continues its decline over the next few weeks, the bulls will have a difficult time driving stocks higher. I don't expect to see more than a 1.7% decline in the euro for the remainder of the year. But headed into next quarter, I see no reason for the euro not to fall by another 3-5% by February.
The Fed meets today and not much is expected from the meeting. But most investors expect another round of easing early next year from the Fed. Today, I will be looking for wording that suggests an earlier date for more easing next year - maybe next meeting. I will also be looking to see if the Fed changes their stance on inflation after commodities rallied hard and oil moved back above $100 since the last meeting. Today is Ben Bernanke's birthday, but hopefully the market will get a gift instead of him.
Aside from the economic data, I'll also be watching gold this week. The price of gold has quietly moved lower while the market moved higher. And the yellow metal still looks like it has room to fall by another 10%.
Where do you think gold is headed? Please drop me a line sometime today at marketforecast@wyattresearch.com.
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