Traders flinch in global selloff. GE tests the bulls: What to watch

Here’s what to watch during the trading day.

The markets this year have been a version of the old playground game “two for flinching.” That’s where one kid fakes punching your arm, and if you flinch he gets two free shots as punishment.

There have been so many plausible excuses for the stock market to suffer a more stinging setback than it has – earnings on the slide, Greece flirting again with insolvency, the Fed looking for a chance to play bad cop.

Yet anyone who flinched too soon and sold quickly was forced to watch the big indexes gain their footing again and return to the cusp of all-time highs. Global money printing, firming economies in Europe and a sturdy credit-market backdrop have lent support.

This is the pattern that has driven the percentage of small investors saying have a “neutral” outlook on stocks to a 12-year high last week.  

So maybe today’s run of news will serve as still more feigned punches thrown at the cautious investor. But for those watching, we got another surge in Greek bond yields as hopes fade for a satisfactory resolution to the bailout standoff there. German 10-year yields are plumbing the zero line.

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And China jabbed at the legions of speculators that have been driving a huge rally there by cinching up margin lending and loosening rules for short selling. Funds that track the Chinese market took an immediate hit as those headlines hit, and European stock indexes tumbled near the same time.

The nature of the news is never as important to investors as is the market response to it. So the way the latest run of somewhat scary reports is absorbed by the tape will tell us whether the flinchers will be punished again, or vindicated.

This also goes for the reaction to corporate earnings. On that score, watch how General Electric Co.'s (GE) unimpressive results are digested.

GE is a pretty good proxy for the prevailing hopes and fears of investors right now. Pressured by a strong dollar and hurting from its exposure to the troubled energy sector, GE a week ago sought a fix in financial engineering, announcing it would shed most of its finance business and do a huge stock buyback.

Today’s action in GE – still one of the most widely held companies on earth, even 15 years past its days of dominance – is a nice test of the market’s tenacity.

For all the frustration of the bears by the resilient action to date, this market really hasn’t penalized the cautious as much as it probably seems. The S&P 500 is up only a whisper over the past five months, a period when government bonds have done just fine.

One reason might be the way we all front-load the worry. That’s probably why the early stretch of earnings season has been so far easy for the market to handle.

As Barclays strategists note, heading into the profit-reporting period, analysts slashed forecasts by twice the usual amount and the most since late 2009. The ratio of negative to positive pre-announcements was the highest in a decade.

And yet once the reports hit, the companies make sure, on balance, to outdo the tempered expectations. In every one of the last 23 quarters – that’s essentially the entire span of this bull market – actual results have exceeded the final forecasts.

As long as this game keeps up, things might stay tough for those who keep flinching.

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