As the 2012 trading year starts to unfold, investors may already be forgetting an important lesson learned in 2009, 2010 and 2011: There is no such thing as an extended rally or an extended slump. The market fixates on good news for a few weeks -- even a month or two -- and then takes an opposite tack, concluding that the sky may be falling. The only winning formula in such an environment is to focus on the potential positives when stocks are hated and to anticipate trouble spots when stocks are loved.
I've been thinking about this in recent days as U.S. stocks start to percolate while European economies slip into a clear-cut recession.
The near-term is crucial. The S&P 500 has near-term resistance at around 1,285, and we're back near this level, which was last seen in late October.
This disconnect between rising U.S. stocks and a still-scary crisis unfolding across the Atlantic can't last for long, so investors need to stay very focused on what is happening in Europe. Either Europe will (finally) get its act together, justifying the market's recent optimism, or U.S. stocks will succumb to gravity's pull.
Here's the latest snapshot of the European mess, and how it could affect U.S. stocks in coming weeks and months.
Just this week (Jan. 9), the leaders of France and Germany delivered another stern threat to Greece: "Cut your budget sharply before we disburse any more loans." Trouble is, politicians in Greece have already made a series of belt-tightening moves and it's unclear whether they have the political will to make further cuts. Greek citizens have become more vociferous in their view that any more cuts will lead to even deeper social distress. Still, Greece has already received $165 billion in aid -- and needs more just to keep from entering into an even deeper economic spiral.
"The situation is very strained, maybe more than ever before in the euro area," said France's Prime Minister, Nicholas Sarkozy, in a press conference on Monday, Jan. 9.