Sometimes one side of the trade gets too full. It’s really as simple as that. You can be in a bull market, or you can be in a bear market, and it really doesn’t matter very much. If one side of the trade gets too intense, meaning too many bulls, or too many bears, you can have a counter-trend rally to work off those conditions to bring back the necessary fear or greed. In this case, the trade got too bearish with the 21-day put/call reading above 1.10 for quite some time. This was joined by the bull-bear spread at only 7.6%, a very low number indeed. Anything below 10% is tough on the bears short-term. Being in concert with the put/call ratio just couldn’t keep the bulls away very short-term, but again, this doesn’t mean the bigger picture has turned bullish once again. It also doesn’t mean we crash out on the next leg down. The odds have improved ever so slightly that the next leg down won’t be as terrible as previously thought, although that is truly unknown at this point in time.
If this rally doesn’t ramp up bullishness then the next move down may see inverted numbers on the bull-bear spread. That would increase the odds dramatically if the worst of the move would be over at that time. It’s going to be interesting to see what happens in the next set of numbers, for sure, but for right now, it’s simply too bearish out there for deeply sustainable down side action. Down days for sure. Sustainable, such as the last move down, or anything that close is unlikely for the moment. All of this makes today’s rally at least understandable from a technical perspective. Fundamentally the durable goods report was slightly better than expected, thus that gave some fuel to the fire, although the market was up early and then went red. To me, it’s more the technical nature of too much bearishness that gave the market its jolt higher today.
The rally was across the board today. That’s good to see since the worst performers even joined the party to some degree. Not the semiconductors, which were pathetically red for the day. But the financials, the weakest of the weak, had a nice bid all day. Nothing to get excited about folks. To say they were due for an oversold bounce is clear. Today’s rally doesn’t mean the worst is over. We all look for clues that maybe the next move down will be the final swoon for these hated stocks.
Watching stocks like The Goldman Sachs Group, Inc. (GS), Bank of America Corporation (BAC), and Citigroup (C), along with the other financials, melt daily is getting old to say the least. Not that they don’t deserve to do so, and I, for one, believe they do. It’s just that a change every now and then can bring some hope to those who are terrible buried in these plays. Most people never sell, and don’t believe stocks can go that low, because they’re told they can’t by the talking heads on television. They learn some sad and tough lessons, but the bottom line is at least today gave these folks some relief.
The fed chairman, Mr. Bernanke, speaks from Jackson Hole on Friday at 10 AM Eastern Time. The market is going to be hanging on his every word. They want to know if there’s another QE program, QE3, on the horizon. They want to know exactly what he plans to do to help this economy get stronger so jobs can be created. There’s maybe too much hope being priced in right now. Hard to get a handle on it exactly, but the world seems to think that he’ll do something now. My gut instinct says he won’t.
He will spend a lot of time telling the world that he has lots of tricks up his sleeve and won’t be afraid to deploy one or more of them should things worsen into a recession. I’m not sure how the market will react if he does nothing now, but my sense is that since we rallied hard ahead of the report, the market would likely sell off. He could shock the masses and catch everyone. and mean everyone off guard with another easing program, but I don’t think he’ll do that since the last two were colossal failures. Only if he’s forced, do I think he’ll pull the trigger on more easing for the economy. Be there at 10 AM Friday.
To me, the big day for this market is September 1st. It’s a Thursday and it’s the day the ISM Manufacturing Report comes out to the world. The last one on the first business day in August was terrible with a 50 reading, which means there’s no longer any growth. A number below 50 on September 1st would be devastating for this market and the economy as it would suggest we’re already in a recession. A number below 50 shows contraction, and last month we were right there. That’s when this market started to really give up to the bears. A number above 50 would be at least a near-term positive as it suggests there was a bit of growth month over month, and at least we were able to avoid contraction in the economy for now. This report may be the best indicator with regards to economic health of lack thereof. It’s a real important report to keep an eye on.
The market is nowhere close to being out of the woods here. S&P 500 1194 to 1199 is massive resistance as that is where we have the 20-day exponential moving average and the top of a large gap down. The bull-bear spread gives the bulls some hope, but if we confirm a recession, that won’t help one bit. The bull-bear spread is NOT a buy or sell signal. It’s a short-term momentum changer, but not a big picture one. If the news gets bad enough, this market could totally free fall. Lots of cash makes sense for now.
Peace,
Jack
