Sure Looks Like a Relief Bounce
- Rubber band was stretched and with SP500 at a bounce point stocks put in a solid price bounce.
- Jobless claims continue the improvement trend.
- CPI overall too hot though core is, according to the Fed, just right.
- Philly Fed shows manufacturing is still on fire even as service sector prices rise.
- If the market is going to bounce, this is where it should do so given the prior consolidations.
MARKET SUMMARY
Sure looks like a relief bounce, but that is how all rallies start.
On Wednesday I talked about the rubber band being stretched taught after an abrupt two weeks to the downside. Moreover, SP500 was testing near levels were you would expect it to hold and bounce. Namely, we are looking at some support levels where the index consolidated in early and late December. I was also looking at the Fibonacci retracements where it undercut the 50% retracement of the November-February move. It had bounced modestly off of that level to close right at that level. It was looking at some decent support after a sharp decline. It could have sold a bit more or it could have bounced. On Thursday it turned out it was ready to bounce. Indeed, it bounced from the open.
The futures were sharply higher. They gave back a little, but then the session started nice with a solid rally. It could not hold the move to the close, but it was decent enough to put away a nice gain. It was a decent relief-type bounce on all of the indices. NASDAQ, +0.75%; SP500, +1.3%; Dow, +1.4%; SP600, +0.5%; SOX, +1.3%. Decent moves across the board.
Volume was down. Volume will usually rise the day before an expiration. It was up on Tuesday and Wednesday, so a pause before expiration would be okay. We have had a lot of volume this week, at least compared to weeks prior. It was not a broad, strong move in terms of volume back to the upside, but it was a decent bounce after a good tail-kicking to the downside.
The market is getting its head around some of the issues it has been facing over the past couple of weeks. There are the various problems in Japan, the EU and its continuing debt problems, and then the North Africa/Middle East (and where next?) unrest. There is quite a bit for the market to chew on. If you were ready to sell after a good November-February rally, you certainly had enough reasons to pull the trigger and take some gain off the table, and that is exactly what happened.
The market somewhat resumed the status quo that got it where it was in February before this correction started. The stock indices were bouncing. The dollar was a bit different, although it continued its trend lower. It tried to bounce, but now it is getting sold off. A lot of that has to do with the buying of Japanese yen in order to pay off claims. We have a decline, and the question is whether this decline will be more catastrophic one for the dollar or if it is just related to excessive yen acquisition right now. There are a lot of claims in Japan and other programs have to be paid for in yen, so dollars are sold and yen is purchased. Indeed, a lot of currencies around the world are sold as the yen is purchased.
There no economic data out on Friday X at least no scheduled economic reports. There will be news out about Japan, Bahrain, maybe Libya, and possibly the EU. We may even make some news in the US as we continue to work on our budget issues. We will see if we can make any headway there.
As a quick aside, we have got to cut spending. It is insane what we are doing to ourselves. I’ll have some numbers on that later. There is something over the weekend I want to talk to you about on a healthcare issue. I want to give you some real data on what we need to do as far as our healthcare.
It will be expiration Friday. There could be a lot of gyrations. We have already seen great some up and down during the week, so it may have gotten it out of its system. Often when there is a back and forth expiration week, Friday can be pretty tame. We will see what is out there. Some construction and industrial stocks are looking decent. Some of the financials could start turning for us and be a decent play. Then we have energy trying to bounce back. We could get something out of that as well. There are some fertile areas we can take a shot at. Maybe even gold or silver, although the mining stocks do look pathetic. Gold or silver themselves could prove interesting.
It looks like there is a recovery attempt underway. We are just not sure how successful they will be. All the markets reverted somewhat toward their trend of late on Thursday, and we will see it likely try to do the same on Friday. I do not anticipate doing a lot on Friday given that it is expiration. If we see some of these areas that are set up well and hold well, we could take advantage of that. The question is whether we want to use further upside as a mechanism to exit upside plays before Monday or if we want to let this thing run as much as we can.
If the market is moving up but a stock we have an upside position in is not participating in the relief bounce, we usually get out of that stock. It cannot even generate enough interest to get going in the relief bounce, so if the selling returns it will not fare very well. It is best to use the relief bounce to get out of it.
What do you do with a good performer? If it is holding support and bouncing nicely, typically we will let it do that. If it is struggling right on a support level and has not broken it but is not really bouncing, that is problematic. It could be just consolidating, basing, and not paying attention to the bounce overall because it is going about its own business. A lot of leaders will do that; they will ignore the market overall and tend to their business. Then when they are ready to make the serious break they do so.
If you have a laggard that is not bouncing, use the upside to get rid of it. Whatever amount it does bounce, use it to get out. Odds are it will not perform well after that. If a stock you have is a good winner for you, or it is in solid position and is not under a lot of stress, you might as well leave it. This market has a potential to move higher. The leaders that are hanging onto support and looking solid in good patterns will be what lead it to the upside. No point in getting out of a stock that looks good simply because we have a gut feeling the market may go down. I do not necessarily like what I have seen in the market. If it does bounce, it definitely has the wherewithal to do that with the setup it has. We do not want to be out of that move. We want to ride the winners high, and we have some good stocks to the upside we can play if it does make that break.
Do not let the NASDAQ chart scare you necessarily. This looks pretty ominous, but if you buy into the fact that this is an equivalent pullback to these prior two pullbacks, it is in position and it is time for it to make its move. Same with the SP600. It has not declined nearly as much as the other indices, and it is holding at this prior support level. It has held there four times over the past three months. It is in position where it would bounce as well.
With the Fed still putting money in and investors may be getting a handle on the geopolitical and natural disaster issues in the world, maybe they will be ready to rally things. If they are, we will have some positions to take, and we will also ride our positions higher. At the same time, I don’t know if the semiconductors and techs will make it. That is why we have been taking some downside positions on them. If they do not, we will play them to the downside and see what we can make out from them. If it does break lower, we will be in great position to take advantage of those as well.
We will see what expiration brings. I have a feeling it will be quiet after all the fireworks this week.
