“U.S. Stocks Jump in Final Hour, Pushing Up Metal Prices; Dollar Pares Gain U.S. stocks rose in the final hour of trading on speculation the European Union may propose a solution for Greece’s budget deficit, reports Bloomberg.
This end of day soundbite provided the fodder/excuse for a short-covering rally on the Feb 5 NFP report. Traders and investors should recall that the 2009 low was set on the March 6 NFP report, that the 2010 high came on the day following the Jan 8 2010 NFP report and that the crest of June 5 2009 leading to the June swoon of 2009 came on a NFP report. Obviously, the spark for the short covering today had nothing to do whatsoever with the NFP report, but alas, how often do market buying and selling climaxes occur on NFP dates give or take a day? Plenty, and too many for me to recount to you off the top of my head, but longtime clients know to look for and expect equity buying and selling climaxes on key announcement dates such as NFP reports. End of story, period!
However, the situation in Europe is not solved. Sure, the EU or G-7 may mask over the problems and claim to have them solved in order to restore investor confidence. How many times in the past three years have we seen policymakers allege they have a solution or a fix to a problem, when in fact they haven’t? Countless times of course! And how many times have investors been duped into believing the reassurances of our policymakers in the past three years, countless again right? So, the trick is to consider how well policymakers will dupe investors once again. If they are exceeding good at their art this weekend, stability in the financial markets will be restored once again, which is after all one of the essential aims of our policymakers, and not necessarily ensuring the long term safety and soundness of the financial system which has never taken precedent over short term fixes. But I digress.
In yesterdays report, I had identified 1045-1052 as being “the hole” from which a short covering rally would emerge. Ideally, it would be from below the 1049 Nov 6 NFP low. I did not send the bearish pricing model that indicated the market weakness could extend into the afternoon session of Fridays NFP report. That was my oversight and I apologize. I do rectify that in the chart at the bottom. The market did in fact stay down into the afternoon session amidst the EU’s angst over Greece. As an aside, the March 6 2009 NFP stayed pinned down until late in the afternoon before snapping back miraculously. I can tell you that from memory because I bought 670 in the SP500 on the morning of March 6 2009 NFP report and held on until the release of the bank stress tests on May 7-8, which for me introduced way too much short term uncertainty to justify holding on any longer. On March 6 2009, the SP500 closed 22 points off its intraday low. Today, the SP500 closed 19 points off its intraday low.
The Feb 5 2010 NFP low in the SP500 is however never going to correlate well with the March 6 2009 NFP low in the SP500, but the nature of the late intraday short-covering did. Then, in the day’s following the March 6 2009 low, lawmakers (Kanjorski-led) put the fix in for the big banks to allow them to mark their toxic assets to make believe overturning an FASB mark to market rule and made it retroactive so that the big banks could report Q1 09 profits that would not be more than offset by writedowns. This saved the stock market and it was a slight of hand by lawmakers that made much of the 2009 rally possible. Most big banks by definition are still technically insolvent, but policymakers would vehemently argue otherwise.
Now here we sit almost a year later, and this time it is the EU that has to act say some observers. “The markets are expecting a positive announcement out of the European Union this weekend as it relates to Greece and their debt,” said John Brady, at Chicago-based MF Global Ltd. “Although it’s unclear whether Greece will be bailed out, some in the market think the EU has no choice.”
In short, the weekend warriors in the Old Country are expected to be in full force and this alone prompted the short-covering. “People don’t want to be short over the weekend if the EU says it will bail out Greece and Spain,” said Neil Massa, an equity trader at MFC Investment Global Management Co.
While one can never say that short-covering rallies like this are going to suddenly happen out of the blue, long-time market participants are fully conditioned to anticipate announcements at critical moments like this. To seasoned vets, the short-covering rally was no surprise at all.
I am making no claim that the Feb 5 low is going to hold for any length of time for the bulls or that the Feb 5 low is going to be cratered in short order for the bears in the coming weeks. There are way too many uncertainties and unknowns that no one can measure or forecast accurately. What I can measure and what all traders and investors alike can measure near term is to discern whether downside risks are diminishing or not, and whether financial stability is being reintroduced to the markets. If not, our job is to locate approximately when and where these downside risks might be reintroduced to the markets.
I will say that there are plenty of behavioral models that point down and that point up. Now, I really don’t care which models play out near term. In the coming days and weeks, our task is to identify where and when selling pressure might likely be encountered, and when and where buying interest might show up (like it did today). From there we can adjust our positions accordingly.
But before looking at those questions more in depth in the coming week, let me quickly review the low that set today at 1041. It was interesting for the low that set today at 1041 represented a 61 point decline from the high of Tuesday Feb 2. The Tuesday Feb 2 to Friday Feb 5 decline was perfectly symmetrical in time, price, and even pattern to the 61 point decline of Tuesday Jan 19 to Friday Jan 22. This was extremely important to note, even the days of the week correlated, but only insofar as helping identify a time and price target for a low today.
Now what is extremely important is to note is the qualitative difference between the low of Friday Feb 5 from the low of Friday Feb 22. Where the Friday Feb 5 low is qualitatively different than the Friday Jan 22 low is in the short covering rally that ensued. The rally off the Friday Feb 5 low is much stronger. The rally off the Friday Feb 5 low is also qualitatively stronger than the rally off the Friday Jan 29 low. None of this should be unexpected. And this is also sending a strong market signal that the rally off the Feb 5 low will be qualitatively stronger in both duration and price. However, we must also acknowledge more technical damage has been done. This means the Feb 5 low will have to overcome more headwinds than these previous lows. Can it be done? The frank and honest answer is no one knows.
No one knows how investors will respond to the noise that will be issued from EU policymakers this coming week. But I do know that out of the gate on Sunday night and Monday morning, downside momentum is going to be quite strong around1074-1076 and 1085-1086. No matter how wonderful a bailout of Greece might sound on Sunday night, plowing through 1075-1085 unabated seems to be a very low probability event. Rather, that downside momentum in this zone is apt to push the market lower, how much lower we will evaluate when the market encounters those headwinds. (It is almost impossible to consider how low a market will go if we haven’t first learned how high is high. One needs to know ones castoff or starting point)
As noted in earlier reports, a minimum 25 point short covering should be anticipated off of any low. Off of 1041, that gives us a 1066-1067 price target. 1067 is the Nov 27 09 Dubai Crisis low. If nothing is resolved in the EU over the weekend, 1067 may indeed prove to be a formidable ceiling for the next leg down to new move lows in 2010. If however, the EU says or does something to shore up confidence, a move to 1074-1076 should not surprise at all by Monday. 1086 is the extended target for any sudden restoration of animal spirits into riskier asset classes out of the gate next week.
Chart not shown on blog due to WP failure with image capture, sorry. Email me if you wish to see the chart at jb2@structurallogic.com
