At The Market: Tug Of War

All week stock averages fluctuated, usually down in the mornings and popping up to moderate gains in the afternoon. This slow grind upward however, is largely dependent on what happens next in Europe. So far there hasn't been any thing new but that could change as Europe gets back in business after their long holiday season.

As expected, the good news coming out of the U.S. economy has encouraged investors, while higher yields on Italian sovereign debt provided a counterweight that leaves the markets in a tug of war. The lack of news out of Europe allows investors to pay more attention to American data, such as the drop in the unemployment rate to 8.5% from 9.4% this time last year.

Beginning next week, however, European players should be back from their chalets in Switzerland or Spain and the fun begins all over again. At the same time, we face another earnings season and if earnings are not up to investor expectations we could definitely see a sell off.

Alcoa, the aluminum maker, kicks off the earnings season after the close on Monday and the company has already warned that higher costs and declining prices are threatening profits. Retailers admitted that Christmas sales were not as strong as they had hoped. I had warned readers not to fall prey to the holiday season hype on how great Christmas sales would be for retailers. Those who did best were those that offered thrifty consumers massive discounts off list price.

Short term, absent any new positive developments out of Europe, we could see some profit taking in the weeks ahead. That should be no surprise to investors, given my outlook for 2012. In my column "2012 could be another up and down year" I outlined the risks and opportunities we face this year. To sum up, I expect a choppy first half with a possible 'sell in May and go away' scenario. The second half could be better, thanks to election excitement and hope for a more functional Congress and Senate.

I also warned that any number of unknown events ranging from what happens in Europe, The Fed's monetary policy, and actions (or non-action) out of Washington could make any forecasts, including my own, worthless.

Take, for example, this week's rumor (later denied by the White House) that the Obama Administration is planning a mega refinancing ($1-$3 trillion) of the American mortgage market.

Back in September, I wrote in "What the Markets Missed" that such a plan was being debated within the White House. The program would not require congressional approval and could be conducted largely through the Fed, the FHA, Fannie Mae and Freddie Mac. It is an election year, after all, when the sitting President will do all he can to stimulate the economy before the elections. That type of left field developments has the power to dramatically alter the market's expectations.

The cross currents within the markets remain. As such, I will stay defensive with a large percentage of my portfolio sitting in bonds and dividend yielding stock funds. I will let the markets dictate my next move or when to become more aggressive. In the meantime, expect volatility.
 

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.