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European Promise, Earnings Season Lead to Resurgent Optimism

A promise from France and Germany to recapitalize Europe's banks continues to drive the bullish action, as futures are 12-15 handles higher this morning. Over the weekend leaders of the Europe's
Scott Redler is the Chief Strategic Officer of T3 Live. He develops all trading strategies for the service and acts as the face of T3 Live. Mr. Redler focuses on thorough preparation and discipline as a trader. Mr. Redler has been trading equities for more than 10 years and has more recently received widespread recognition from the financial community for his insightful, pragmatic approach.
Scott Redler is the Chief Strategic Officer of T3 Live. He develops all trading strategies for the service and acts as the face of T3 Live. Mr. Redler focuses on thorough preparation and discipline as a trader. Mr. Redler has been trading equities for more than 10 years and has more recently received widespread recognition from the financial community for his insightful, pragmatic approach.

Perhaps another reason for a higher open this morning is anticipation of earnings season. While economic data has not accelerated to the point of a meaningful recovery over the course of the past two years, corporate earnings have repeatedly surpassed expectations. The market seems to get a boost from earnings season every time around, with corporations holding onto cash and cutting costs rather than hiring aggressively in this uncertain environment.

With increased automation and many jobs going overseas, this may turn out to be a jobless recovery, but American companies continue to prosper. The unofficial, but widely-recognized, start to earnings season is tomorrow after the close when aluminum giant Alcoa (AA) reports. On Thursday you will see bigger reports from the likes of JP Morgan Chase (JPM) and Googe (GOOG).

Technically, the market looks set to push towards the upper end of the lower range on strength of earnings and the European banking recapitalization promise. The “funny” thing is, over the past two months the market has sold several promises and pledges from European leaders that have not been immediately met with action. Europe has been taking steps to shore up its banking system for two years, and much of it has been in vain. Now, French and German leaders are promising to unveil a possible plan in a few weeks time, and the market is suddenly excited? Either way, the market seems to be in glass-half-full mode, and IBD says to look for a strong continuation follow-through day within 4-7 days of the reversal, which came last Tuesday.

The market has not closed a day above the 50-day moving average since late July, and we are approaching that level this morning. If we close above 1177 today on the S&P that will be another win for the bulls that should open the door to test the upper end of this lower range that stands at 1220-1120. A close above 1177-1195 will also break the series of lower highs, breaking that bearish pattern that has controlled the markets since we broke 1325 late July.

Unfortunately I don’t see a ton of stock leadership at this stage, but that can change with a strong follow-through day this week. A healthy market has leading stocks that are looking to bust out to new 52-week highs. But there is more than one way to skin a cat, and traders are now looking at stocks ready to break downtrends.

*Disclosures: Scott Redler has no positions.

The astronomer Carl Sagan said, “It was easy to predict mass car ownership but hard to predict Walmart.”