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The Day Ahead: Welcome to Your Personal 'Gut Check'

Listen. There was a "key reversal" in the S&P 500 last Tuesday -- the market jumped at the open to a new high, and then closed below the prior day's lows -- as was duly noted in Barron's, as well as in this column. That should have set off all kinds of inner alarm bells, and it should have confirmed more than a handful of negative recent macroeconomic signals that had gotten lost in the wave of bullishness. Since I believe you overlooked the meaning of that "key reversal," and since the fear there is this indecision on the next course of action, here is your gut check.

The Fed: I am starting to believe we'll see a muted to negative reaction in stocks not only if Bernanke and company reluctantly holding the line on a new round of quantitative easing, but also if the Fed acts at all. For real, $250 billion in additional bond buys will be disappointing, as it will massively let down the bulls and support the view that the Fed is running dry of actions to energize the recovery. Gut check: A lose/lose scenario is taking shape around an event that, weeks earlier, had only been seen as über-positive.

The European Union: When you buy a stock today, you are essentially pledging faith that EU politicians will act in September in a manner that keeps "euro debt risk flare" at bay, as this was a key driver of the rally. Overall, that is too much faith for my liking, and especially as the ECB gears up to convene Sept. 6 -- a meeting in which the central bank is likely to delay bond purchases, which would then undermine ECB President Mario Draghi's recent rhetoric. A German vote on the EU bailout fund is scheduled to follow that meeting, as well. These people deserve none of your faith -- case closed. It's a lose/lose scenario on the horizon.

The "China Syndrome" is rampant: I have coined a new finance term, and it's called "China Syndrome." Do you have it? Dr. Soz diagnoses it as a perpetual belief that China is always waiting in the wings with an interest-rate cut and that, should it act with one, this action will immediately reverse many increasingly worrying signs on the ground. Riddle me this: Would an interest-rate cut in the next one to three months reverse a downtrend in unit prices at Tiffany (TIF - Get Report) in China due to a shift in how the Chinese are consuming? Or would it be super helpful toward cleaning up excess inventories of Nike (NKE - Get Report) sneakers and of steel? I'd say "nope" on both accounts.

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Chart of I:DJI
DOW 17,813.39 +1.20 0.01%
S&P 500 2,088.87 -0.27 -0.01%
NASDAQ 5,116.1430 +13.3350 0.26%

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