It appears that Europeans have successfully kicked a heavily dented and rusty can down a bumpy road. Markets reacted positively to the news with the Dow ending the week up another 1.37%. The bellwether Dow index is now up over 5% year to date, while the S&P is basically flat.

Should news out of Europe continue to be neutral-to-positive, expect equities to continue this upward swing through the remainder of 2011.  European leaders may have introduced the framework of an acceptable plan of action, but the devil is always in the detail. Do not expect an end to the European soap opera and the current level of volatility in equity markets. There will be pullbacks, and they should be viewed as buying opportunities. However, be aware when moving into both the fixed-income and equity markets for the remainder of the year that investors will have a focus on tax-loss selling. Also, do not buy funds in taxable accounts unless you are aware of the 2011 tax ramifications.

Market movers this week will include an important earnings report and future guidance from FedEx. Financial results issued by this global transportation company are a leading market indicator because of their U.S. footprint and significant business overseas. As usual, investor focus will primarily be on the firm’s future market expectations. (Also note that analysts expect FedEx to raise prices by approximately 5% in 2012.) Additionally, Zynga and Michael Kors will be one of 12 initial public offerings being introduced to the street this week. If you can pick up either offering, my recommendation is to sell sometime during the first two days of trading on the open market. Finally, the Fed Open Market Committee will be meeting, but analysts do not expect any major changes to current monetary policies.

As long as everything remains relatively quiet on the European front, markets are likely to end the year strong, culminating with a Santa Rally during the last five days of the year. An important indicator will be whether the Dow and S&P can get past current highs over the next several days.

An interesting opportunity for investors with a higher risk tolerance level will be to increase exposure in small caps on pullbacks. If you buy into small caps, use limit orders to protect yourself from significant downside hits. The Vanguard Small Cap (VB) and Vanguard Small Cap Growth (VBK) are a couple of solid low cost small company options to consider. I also continue to recommend iShares Dow Jones Select Dividends (DVY) and Wisdom Tree Dividend Ex-Financials (DTN) as investments offering higher than average dividends and upside potential.

The historically high level of volatility over the past several months, with daily swings of 100 points or more becoming commonplace, has ironically provided a small level of predictability in the markets.  Take last week; the markets shot up Monday and Tuesday, setting up for an obvious downturn on Wednesday and subsequent rebound on Thursday and Friday. The Dow ended the week up by over 1.4%, and gold rose another 1.8%, leading to a 25.8% year-to-date return.

Some important fundamentals to note: corporate earnings are continuing to show strength, and Europe appears to be stabilizing. Since Italy and Greece are finally addressing their deficit problems, and consumer sentiment in the U.S. is on the rise, low risk investment options, such as bonds, are likely to decline while investors move more assets into equity.

The earnings season comes to a close this week with results from Lowes, Home Depot, Staples, Wal-Mart, JC Penny, Target, TJX, Heinz, Dell, NetApp, and Marvell Tech. Additional market movers include Italy, the Congressional Super Committee, upcoming announcements to be made by a number of Fed Directors, CPI, housing starts, and of course jobs.

I expect equity markets to be strong for the remainder of 2011 and into the first quarter of 2012 assuming positive Super Committee results and a stable Europe. As mentioned in previous updates, equity markets are historically strong in the fourth quarter, and the U.S. is also entering a Presidential election year. Broad market averages tend to outperform during election years when a sitting president runs for re-election.  This is evidenced by a recent MarketWatch commentary written by Howard Gold, titled “2012 Could Be a Good Year for the Market.”  The article reveals that in the 14 presidential elections since 1928, when an incumbent president is running for re-election, the S&P has generated over a 14% return.

Therefore, I recommend to cautiously increase equity exposure on down market days by concentrating on high dividend-paying industry leaders. A number of firms to consider are AT&T (T, 5.8% dividend), Verizon (V, 5.3%), Excel Energy (XEL, 3.9%), ConnocoPhillips (COP, 3.7%), Intel (INTC, 3.4%) and UPS (UPS, 2.9%). Exchange traded funds (ETF’s) to analyze include iShares Dow Jones Select Dividend (DVY) and Vanguard Dividend Appreciation (VIG).

As predicted, the October rally took a break last week, with the Dow losing over 2% in volatile sessions. After an outstanding October, a 2% to 3% pullback is considered reasonable and gives the market a necessary breather. Losses were connected to profit taking and the never-ending Greek “tragicomedy.” Despite the focus on Greece, Italy is genuinely a far greater problem evidenced by the enormous scope of its debt issues.

The anticipated good news this week is that investors are likely to be focused on earnings with GM, Toyota, Macy’s, Disney, Cisco and HSBC leading the way. To date this earnings season, firms have projected a remarkable fourth quarter growth rate of approximately 15%. Other important news to watch this week will include jobless claims, oil inventory levels and MF Global bankruptcy proceedings.

Since U.S. based firms are expecting a meaningful fourth quarter growth rate, markets would typically rally for the remainder of the year. Although, there are a couple of significant hurdles investors must take into account including the European soap opera (which has completely dominated any good news out of the U.S.) and potential problems associated with the Congressional Super Committee. Ultimately, a stable Europe and a bipartisan solution to our deficit problem are essential for the October rally to extend through the remainder of 2011.

Additional facts to consider going forward:

• Broader averages fell by approximately 20% from the end of April to the beginning of October
• Strong corporate balance sheets and forecasts
• Practically a zero percent interest rate
• Low rate of inflation
• Historical support for a strong fourth quarter

Should we actually encounter some level of stability in Europe and a bipartisan resolution to the U.S. deficit issue, October 3 may mark an important 2011 market bottom. My recommendation is to cautiously take advantage of last week’s 2+% pullback in the broader averages by increasing exposure in dividend paying brand name securities.

During periods of significant volatility, a concentration in high dividend paying brand names, gold, short/intermediate term bonds and cash equivalents contribute to a decrease in overall downside volatility. Therefore, in addition to the broad based equities recommended last week, consider the following Exchange Traded Fund (ETF) positions.

Symbol                 Name                                                                                    Sector

GLD                        SPDR Gold Trust                                                               Precious Metal

IAU                        iShares Gold Trust                                                           Precious Metal

CSJ                         iShares Barclays 1-3 Year                                               Short Term Bond

CIU                         iShares Barclays Intermediate Credit                       Intermediate Term Bond