Are We...........Or Aren't We ?

George Brooks  |

Brooksie's Daily Stock Market blog  - An edge before the open

Wednesday, August 17, 2011      9:11 am EDT

DJIA:  11,405.93     S&P 500: 1192.76

Not a bad performance. The market averages closed well off their lows despite disappointment over the Brussels European sovereign debt meeting  and mixed signals on the U.S. economy.

There are obviously some institutions that feel comfortable doing some buying in here. That comfort level will rise if  forthcoming economic indicators suggest the economy is not tanking.  So far, the reports are ho-hummers, which is good news, since the Street has been talking double-dip.

Let’s say you are camping out  deep in the woods over night. You were warned bears had been spotted in the area, but why let that stop you.  Early in the dark morning, you are abruptly wakened by  a noise.

What do you do ? 

Break camp ?  Hang tough ?

If economic reports raise odds that a recession is imminent and you didn’t sell, you get savaged.  If you bailed out and  reports confirmed a recession wasn’t going to happen, the market roars and you miss a great opportunity.

The July/August plunge in stock prices discounts the uncertainties arising from Europe’s problems and concerns about a possible recession, but not  a failure of Europe  to address those problems, or the reality of a recession here.  If the latter plays out, the market must drop further.

Industrial Production surprised on the upside yesterday with a gain of 0.9 percent, but one must consider that while  U.S. production was adversely impacted by Japan’s earthquake  last March, it  is now recovering from that calamity.

Producer Prices for July were reported today (not a game changer), but Thursday could pack some punch with Jobless Claims at 8:30 and the Philly Fed (area business) survey results and Leading Economic Indicators at 10 o’clock.

The latter is especially important since the markets were hammered after  Jeffrey Frankel, a member of the “Business Cycle Dating Committee” of the National Bureau of Economic Research was quoted  earlier this month as saying, “The sum total of the indicators over the last six months points to increased recession risk over the coming year.”*

Fitch Group maintained its AAA rating for the U.S. yesterday, referring to a stable outlook  and our nation’s central role in the global financial system and our diverse flexible economy.

Europe’s economy  has slowed considerably, as its 17-nation GDP  posted its worst post-recession performance , a gain of 0.2 percent.

Yesterday’s Brussels meeting featuring Germany’s Chancellor Angela Merkel and France’s President Nicholas Sarcozy yielded proposals to address sovereign debt issues but not enough solid stuff to chew on, a mild disappointment, but there may be more to come in the near future.

TODAY:  We are obviously in a news sensitive market, which can run sharply in either direction in reaction to developments in Europe and the U.S. economy.

I think the market needs time to digest recent developments and cope with new ones for a month or six weeks. That can mean a sideways trading range or a sideways-to-down trend. It spells buying opportunity sometime in September/October.

We are still in the “what if” mode, fearful of another leg down, fearful of the gloom suddenly lifting and a surge in stock prices leaving everyone in the dust.

Resistance to a move up is still DJIA 11,495 (S&P 500: 1209), but the market’s stability Monday and Tuesday reduces its significance somewhat.  We need some better news out of Europe and from our economy to break through that resistance level which would enable a rise to the DJIA 11, 675 (S&P 500: 1226) area.

George Brooks

*Bloomberg.com

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The writer of Brooksie’s Daily Stock Market blog, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk

 

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