Back from the Brink of Bad

Jack Bouroudjian
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Posted: Oct 24, 2011 12:01 AM

The market opened up yesterday morning with a bang. One of the reasons for this is the $1.3T bailout package they’re talking about over in Europe, which would take care of much of what’s ailing their sovereign financial institutions.

I’ve mentioned quite a few times that the Europeans have slowly been moving from denial to acceptance, but this bailout package—if they can get it done—really tells me that the pendulum is swinging in the direction of a more stable European Union.

Meanwhile, earnings continue to be positive. As I mentioned on CNBC’s Trader Triple Play yesterday, of the 15-20% of the S&P 500 companies that have so far reported, 70% of them have beaten the Street. I’ve said it before and I’ll say it again: the lowering of expectations was too low.

People were pricing in Armageddon—a breakup of the EU and a double-dip recession here in the States—but it never arrived. So, as investors, what should we be watching now?

As I write this, the market is getting into a wicked resistance area. I say wicked because that’s what it was when we took it out on the way down, so that’s why I’m paying close attention to it on the way back up. Let’s see how the market treats the 1235 level in the cash S&P (around the 1231 level in the front-month S&P futures contract). If we can work through that and stay above it on a weekly basis, look for this rally to continue.

Strong earnings, a more stable Europe and a Chinese economy that’s loosening the reins are key ingredients for a very nice time to be in equities. Pricing in a 2008 that didn’t happen has created a gem of opportunity, so hopefully you listened to me and had your wish list out (and did your own homework) while the rest of the world was sitting on the sidelines.

If you did, you’ll be sitting on a nice lead in your position as all those non-believers rush in, chasing returns and yield before the end of the year.

Right now those non-believers are hoping, wishing and praying that the market stalls out. But as I told my pastor at our church’s finance committee meeting the other day, when it comes to the market, there’s no hoping, wishing or praying allowed. You have to watch what’s happening and react to it.

So watch that key resistance level. Pay attention to the yield on the 10-year, which has made a huge move over the last couple of weeks and is telling us exactly what’s going on as far as the direction of capital flows. Also be mindful that today is a serial expiration—not one of the big quarterly witchings—but still important because October is the end of the fiscal year for a lot of Asian companies.

And as you turn all this over in your mind, don’t forget to ask yourself this: if the market priced in a worst-case scenario that never arrived, what’s the next logical move?

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I mentioned this on the show yesterday and wanted to touch on it quickly again today. As you’ve all heard by now, Muammar Gaddafi was killed yesterday. Maybe, just maybe, that’s a signal that Libyan oil production will get back online sooner than later. That would really help the situation in Italy, because the Italians are more dependent on Libyan oil than anyone else. And any help to Italy could be an unexpected boost for the Eurozone. Keep an eye on that, and pray for a swift end to the violence and conflict there as well.

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A couple of quick plugs before we head into the weekend: Currensee and I will be presenting a webinar, “Five Best Kept Secrets of Investing in the Growing Foreign Currency Market,” on October 27 at 4:30pm ET. Be sure and register today. Dan “The MoneyMan” Frishberg and I will team up for the Biz 880 Miami Money Expo on November 3 at the Mayfair Hotel in Coconut Grove, FL. Email if you’d like more details or to reserve a spot. Both of these tremendous learning opportunities are FREE, folks!

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