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The Day Ahead: A Three-Headed-Dog Market

You have never seen a three-headed dog, and neither have I. They exist only in nightmares, perhaps after a viewing of the 1989 thriller Pet Sematary. But, for argument's sake, let's say a three-headed dog managed to follow you on a walk. Obviously this animal would appear very strange to you, and the freakish creature's heads would be going in every which direction and wearing different facial expressions.

That brings me to Tuesday's market action.

Head No. 1: A strange feeling fell over the crowd that, quite possibly, the European Central Bank will disappoint this week in how it chooses to tackle the debt disease -- and I say "disease," because the word "crisis" implies a short lifespan. This reaction was entirely justifiable, as ECB President Mario Draghi apparently wants three-year bond buys instead of the "buy worthless debt forever approach," which is what the market wanted. (That was never going to happen anyway.) Furthermore, this one particular thought got planted in the market -- one that said the ECB will make no significant moves before Germany votes on the European Stability Mechanism, or bailout plan, next week.

Head No. 2: I'm not sure about you, but I got walloped by sell-side notes that should have been released weeks ago. The underlying theme was that investors should de-risk -- a.k.a. book profits -- for fear of headline letdowns in the wake of key events on the short-term horizon.

Head No. 3: Debbie Downer economic data was initially viewed on a stand-alone basis. In other words, the market recognized that the numbers stank, and that they told a tale of a further slowdown in economic growth in the third and fourth quarters that should transmit to an "earnings recession." Ah, but wait -- the market seemingly forgot that its trusted friend, the Federal Reserve, remains ready, willing and able to provide the juice. After this small fact was brought back into the fold, the intraday rally was able to take form.

Once the market realized that bad U.S. data were actually a good thing, and that the ECB may not completely screw up this meeting, stocks reversed course to a stronger degree. Normally, such a swift reversal from left field is met with a heavy dose of skepticism by yours truly. One would have had to consider that glaring negatives were being weighed back and forth, only to get swept under the rug by the sound of the closing bell.

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Chart of I:DJI
DOW 17,750.91 -140.25 -0.78%
S&P 500 2,063.37 -18.06 -0.87%
NASDAQ 4,763.2240 -54.37 -1.13%

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