Despite all the negative geopolitical news, the market has maintained its positive momentum.  Positive earnings reports combined with the relative unattractiveness of returns on cash and bonds have kept investors interested in the equity market.

From Ed Yardeni’s Morning Briefing today:

What do industry analysts have in common with Navy SEALs? They both have nerves of steel. Industry analysts didn’t flinch last week. Despite all the flash crashes in commodity markets, consensus expected earnings for the S&P 500 rose to a new high of $99.69 a share for 2011 and $113.13 for 2012. Forward earnings–the time-weighted average of this year and next year–rose to $104.34, exceeding the previous record high of $103.79 during October 2007. Despite the political upheaval in the Middle East and the nuclear meltdown in Japan, forward earnings have increased every single week since the beginning of the year.

The 2011 S&P 500 earnings estimate has risen 3.9% since the end of last year from $95.97 to $99.69 last week. The Q1 earnings surprise has added $1.16 over the past five weeks to the 2011 estimate. The estimates for Q2-Q4 have all been rising too, and have added $1.05 to the 2011 estimate since the start of the Q1 earnings season. It really is déjà vu all over again with a significant difference. When actual results beat expected ones over the past eight quarters, industry analysts didn’t raise their subsequent quarterly numbers as they’ve been doing during the current earnings season. (See our blog for three charts showing the consensus weekly forecasts of quarterly earnings for 2009, 2010, and 2011.)

On Monday of this week S&P downgraded their outlook for U.S. sovereign debt to “negative” from “stable”.  The news roiled markets around the world.

Fast forward two days later and the equity markets across the globe have shrugged off the news and rebounded smartly.

On Tuesday and Wednesday we had a slew of good earning reports from the likes of IBM, Intel, American Express, and Qualcomm.  In addition to the good news from domestic companies, Spain had a successful bond auction, and the price of oil seems to be rising due to increased U.S. demand.

The market is rising on fundamental good news.   Let’s hope we have follow through and the volume to go with it.

There was not any good news today, but the market has held up remarkably well.  The Case-Shiller home price data continued the decline that began in August.  Home prices in the 10 major metropolitan areas fell 0.9% in January, and the 20-city index fell 1.0%.  The turmoil in the Middle East and the problems in Japan have affected consumer confidence, and the index dropped to 63.4 from 72 in February.

The news out of Europe was gloomy as well.  The banking sector remains under pressure with downgrades of the five largest banks in Portugal, and S&P may also cut the country’s credit rating.  The Irish banking sector may need another bailout after the central bank finishes reviewing the latest round of stress tests. 

As Laura pointed out last week, there has also been good news for the market.  Corporate earnings have been strong, and there have been a number of announcements regarding stock buybacks, dividend increases, and mergers.  However, this tug of war between positive and negative sentiment has continued to unsettle the market.  The ongoing conflict in the Middle East and the resulting increase in the price of oil combined with the disruption to the supply chain in Japan will make it difficult for corporations to maintain margins over the near term.

Yesterday the Dow Jones Industrial Average was up over 180 points.  Today the Dow is down over 130 as of the time of this post. 

While we have received some reasonably good economic data, including a good employment number this morning, oil has climbed back above $104, and it seems to be headed higher.  There have also been a number of companies that have reported good fourth quarter 2010 earnings and revenue numbers, but have delivered cautious guidance going forward.

This dynamic, coupled with the uncertainty of the current outlook for the Middle East, does not bode well for the near term performance of the equity markets.

It should not come as a surprise to anyone that the Chinese are contemplating their own “Jasmine Revolution”.  Bloomberg reported that over the weekend, Internet messages urged people to “gather in 13 major cities to demand food, jobs, housing and justice”.

The Chinese government responded by arresting some human rights lawyers, locking down university campuses, and banning the use of certain keywords on mobile phone messages.

More than rising interest rates, or requiring higher bank reserves, this most recent Chinese ”revolution”, could dampen earnings growth for many companies relying on China to help power their earnings,  and hinder any advance for the equity markets.

Many professional investors would say that the housing market is still in the doldrums.  Projections are downbeat, and inventory is high.

But, just as the market performance as a whole is a good leading economic indicator, so too do certain stocks or sectors predict what may lie ahead for a certain industry.

Jim Cramer recently pointed out in his “RealMoney” column, that stocks like Whirlpool, Lowe’s, Black and Decker, and William Sonoma have seen big upward moves in the price of their shares.

The upward trajectory of these stocks is probably a good indicator of positive news to come in the housing market.  Watch for it.

If the stock market closes out this Friday, and 2010 at or above the levels it closed out today, December 29th, it will be the best December since 1991.  The S&P finished the day at 1259, and the Dow closed at 11,585.

Due to rising demand for oil, the per barrel price will likely finish 2010 above $90.  While this has been great for energy stocks and the related services companies, we will be closely watching this price for continued upward pressure.  At some point, it could certainly put a damper on the consumer and negatively effect our nascent recovery.

To the extent the  job market improves, corporate earnings continue on their upward trajectory, domestic inflation remains tame, and the booming emerging economies can continue to grow while managing their inflation, 2011 looks to be a promising year.

As always we will be watching the data carefully, and monitoring domestic and global activity for any changes that may presage a negative market environment.

We have subscribed to Ed Yardeni’s economic research for years, and he has been a voice of reason during both good times and bad.  Here is the link to an article he had in the Financial Times yesterday.  It is a good summary of what he has been sending us the last several months.

There has been a barrage of earnings reports in the past few weeks.  Most companies have reported better than expected results.  So why the continued trepidation of the market?

While many earnings and revenue numbers have surprised on the upside, some of the forward guidance had been less than stellar.

This cautious/negative guidance is more evidence of the uncertainty faced by companies and individuals.  The lack of certainty regarding government regulation and intervention, coupled with how that is effecting employment leaves companies reluctant to predict how their businesses will fare for the next quarter or the next year.

There has been a lot of negative data hitting the equity markets lately.  And this data is not to be minimized.

However, some positive data has been reported lately as well, and it should not be completely ignored.  Jobless claims today were better than expected.  Retail numbers were mixed, but better than some had expected.  Even Spain and France have had good bond auctions in the past week.

Valuations also seem compelling with the S&P 500 trading at 11.5x 2010 earnings.  That appears cheap even with reduced expectations for economic growth.  And, interest rates and inflation remain low.

Certainly the negatives have not disappeared.  But it is always important to keep some positive data points in sight.