"The enemy of the conventional wisdom is not ideas but the march of events."
-- John Kenneth Galbraith
The market has been acting very bullish lately and many market participants are optimistic that the recent trend will continue. However, we have two major events to contend with this week that could serve as catalysts for a turning point. The first is the kickoff of earnings season and the second is the congressional testimony of Alan Greenspan.
With the market extended on a short-term basis we have to watch very carefully for signs that significant news events act as an excuse or catalyst for the market to change direction. This is primarily an exercise in emotions and psychology and has very little to do with the actual news.
Earnings news could be very good and Alan Greenspan very accommodative, but it could still result in a negative market turn if the prevailing psychology of the market is wrong. The question we need to contemplate is the level of expectations at this time. Are market participants already expecting strong earnings reports and a more dovish Alan Greenspan? If so, it is going to be much tougher to keep the recent move going than if they were pessimistic.
I'm concerned about the market's ability to navigate these two major events. First, we had some minor warnings signs last week as small-caps faltered and breadth was poor. Big-caps are generally too expensive to lead this market for long and without strong speculative action in smaller stocks the market is likely to run out of steam fairly fast.
My biggest concern is that earnings are going to trigger a sell-the-news reaction. The test will come Tuesday night with several important reports from the likes of Intel (INTC:Nasdaq), Yahoo! (YHOO:Nasdaq), Amgen (AMGN:Nasdaq) and Juniper (JNPR:Nasdaq). Are these companies going to be upbeat enough to keep this market running higher? Intel earnings have a history of serving as a market turning point and we'll have to be very vigilant. Alan Greenspan's testimony will also be very important. There seems to be a growing contingent that believes the FOMC is almost finished with its interest rate hikes; they are looking for only one or two more quarter-point increases. They may be right but if they are looking for Mr. Greenspan to confirm that in his testimony this week, they are very likely to be disappointed. It is very unlikely that he will give any insight into the FOMC's future plans and that may disappoint some market participants looking for dovish signs.
We are off to a shaky start in this market following a poor earnings report from Citigroup (C:NYSE), which missed estimates by 5 cents. Overseas markets are mixed and crude oil is down slightly.