How do you trade the S&P 500 after Germany says no to a quick fix?

Last week the December E-mini S&P 500 opened at 1157.75 and closed the week at 1219.25. Since the beginning of the month we have seen a sharp move up from the Oct. 3 close of 1068.25. You can see on the daily chart below that the market traded the entire month of September and half the month of August in a range of 1100-1220 and ADX was below 20 almost the entire month of September. Very weak trending market confirming the range. MACD crossed up over the signal line adding solid divergence and Stochastics started correcting from oversold territory.

Fundamentals

The S&P 500 index recovered to a three-week high from its recent 13-month low on Q3 earnings optimism and as European debt concerns receded.

Bullish factors include:

1. 1. Reduced European debt concerns after European Economic and Monetary Affairs Commissioner Rehn said the Eurozone is moving toward a consensus on resolving the "calamity" of the sovereign debt crisis as European Commission President Barroso called for a "coordinated approach" to deliver a "significantly higher capital ratio of highest quality capital" for banks.
2. 2. Q3 earnings optimism as the market expects earnings per share for the S&P 500, excluding financial companies, to rise a healthy +14% y/y.

Bearish factors for stocks include:

1. Heightened European banking concerns after the ECB warned in its monthly bulletin that involvement of the private sector in Eurozone bailouts through enforced investor losses is a risk to financial stability and would have "direct negative effects" on the banking sector.
2. Concern that economic growth in China, the world’s main growth engine, may be stalling after September Chinese exports rose +17.1% y/y, weaker than expectations of +20.8% y/y and the slowest pace of increase in seven months.

Fundamental outlook — Bear market correction — Stock prices rebounded from their recent 13-month low on signs that European leaders are taking concrete actions to resolve the region’s debt crisis along with optimism over the upcoming Q3 earnings season. The medium-term trend could turn back to bullish if prices can post a decisive new two-month high. Two factors providing some underlying support include record low interest rates and very reasonable valuation levels with the low forward P/E of 12.0 (vs. the five-year average of 14.9 and 10-year average of 16.7).

Have a prosperous trading week.

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