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Minyanville's T3 Morning Market Call: European Promise, Earnings Season Lead to Resurgent Optimism


Technically, the market looks set to push toward the upper end of the lower range on strength of earnings and the European banking recapitalization promise.

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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 Europe's two signature countries pledged everything necessary to prevent another collapse of the system, and so far the Street seems to be taking them at their word. German Chancellor Andrea Merkel and French President Nicolas Sarkozy said they would reveal the plans by early November.

After a three-day bounce, markets closed lower on Friday, but the selling was nothing more than healthy digestion after a big move. While a better-than-expected non-farm payrolls number boosted optimism, sovereign debt downgrades of Italy and Spain weighed on the proceedings. Today, a light volume tape can be expected due to the Columbus Day holiday. Federal government offices will be closed, as well as bond markets.

Apple's (AAPL) iPhone 4S announcement was met with a yawn by many in the tech blogosphere last week who were anticipating a sleek, newly designed iPhone 5. Combine that with the passing of its visionary mastermind, former CEO Steve Jobs, and the price action had, for once, started to feel noticeably heavy. However, AT&T (T) said late Friday that it has seen "extraordinary demand" for the iPhone 4S, with more than 200,000 pre-orders made for the new phone in the first 12 hours. Jobs may be gone, but he made a lasting contribution to the company in the power of the brand he built.

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 JPMorgan Chase (JPM) and Google (GOOG).

Technically, the market looks set to push toward 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, 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 four to seven 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.

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