- Market bounces, SP500 tests trading range break, indices hold gains .  . until the close.
- Dollar beating has resumed as China announces 97% of its short term T-Bill holdings are liquidated.
- Bonds recover modestly, aided by a positive 3 year auction.
- Bernanke lauds Fed’s actions taken ‘at no cost to the taxpayer,’ has to admit the Fed has not thought out the ramifications of the new regulations.
- Tuesday action looks like a test and failure all in one session.

MARKET SUMMARY

SP500 makes a quick test of the trading range break and falls right back down.

Monday SP500 gave up the bottom of its range and that left a few possibilities, two or three of which (depends upon how you group the results) dealt with testing the break.  SP500 opted to avoid the Christmas rush and make the test right away.  Futures were up, stocks started higher, SP500 moved up to the range bottom and by midday even cracked up through it. 

There was some news that could take credit for driving basically a technical move.  IP put in a hostile bid for TIN and that always excites investors in a ‘who’s next?’ game.  China announced it had liquidated 97% of its short term US holdings (T-bills) and that hammered the dollar sending it to a new low against the Swiss franc.  That shouldn’t be good news but in the perverse relationship between US stocks and the dollar, or more accurately, certain US stocks and the dollar (the large exporting stocks whose market capitalization drives the index prices), that news benefitted stocks.

Stocks held the gains into the afternoon, buoyed by a decent 3 year bond auction that saw a good interest rate (lower than believed it would have to be) and bid to cover ratio.  In any event, stocks cruised through the afternoon holding some decent 0.5% and better gains. 

Bernanke makes some astonishing statements.

Then Ben Bernanke started talking, trying to have his cake and eat it too.  He lauded the Fed’s actions and ‘accomplishments’ using monetary policy as he admonished Congress and the Administration to get the fiscal house in order.  But not too fast, mind you.  Congress shouldn’t cut so much so fast that it could damage the ‘recovery.’  He just gave all those not wanting to do any cutting the cover they need.  ‘Who knows,’ they will say, ‘how much we should cut in order to harm this fragile recovery?’  Good call Ben.

Bernanke basically put on a ‘in defense of the Fed’ speech.  He repeated the Fed’s statement.  He maintained the Fed would end QE2 this month but would continue reinvesting principal payments from its securities holdings.  The ‘uneven recovery’ would require a low Federal Funds Rate for the foreseeable future.  There could be a QE 3, BUT it would require a real slowdown, not the ‘transitory’ slowing seen this year.

There were two big statements from Bernanke, one mostly ignored but hugely important, and the other just incredible.  First, Mr. Diamond queried the Fed chairman whether the Fed had flow-charted the ramifications of all of the regulations already passed and those being planned, e.g. the 3% surtax on all big banks just because they are big banks.  Bernanke’s rather sheepish response: the Fed had NOT done so.  Giving its support to nothing more than a tax for being big, among many other more insidious regulations, without giving thought to the ramifications.  Shocking?  Yes.  A breach of duty?  Yes.  Are we insane for letting a Federal Reserve control our money and thus our wealth?  Hell yes.

Second, in discussing all the Fed has done, Bernanke said that even with the ‘blunt instrument’ of monetary policy (how many times has that clich  been overused?) the Fed had managed to basically prevent plague, locust swarms, large outbreaks of human mange, etc.  The kicker: “all at no cost to American taxpayers.”  Oh really?  No cost?  What about a dollar losing 20% of its value.  Gee, that seems like a 20% direct cost right there.  Multiplied across all Americans, that dwarfs anything else the Administration or Fed have done.  Then you consider the inflation of all that money circling the globe.  A 20% reduction in the worth of your dollars then inflation of other items on top of that.  Thank you for not costing us taxpayers anything in taxes Mr. Chairman. 

But I digress.  Back to the afternoon session.

As Bernanke talked stocks started to peel back.  At first it was a modest fade but in the last 40 minutes of the session the selling crescendo peaked and sent all the large cap indices negative leaving just SP600 and SOX holding fractional gains.  Impressive.  SP500 made the test and looks to have failed it all in a day.  It is not dead yet, but it would take a lot of vitamin shots and even some Viagra to get it up again, if you know what I mean.

NASDAQ -0.04%; SP500 -0.10%; DJ30 -0.16%; SP600 +0.30%; SOX +0.55%.

WEDNESDAY

The dearth of scheduled economic data continues on Wednesday. We will have the MBA Mortgage Index, the weekly numbers, and Crude Inventories. Crude Inventories may have an impact. As noted, crude was holding its range and trying to break to the upside, but it is having a hard time breaking away. It also will not just collapse already. It may influence the numbers, but the big news is that we do not really need news.

We have major technical forces in play, and obviously this is a big move over the last week. Tuesday the SP500 tried to break back up into its range. It did it momentarily but failed. The question is whether there is still anything here. Can it hold at this level and make a new break to the upside? The other indices suggest that that could be the case as they are holding their support and look like they might be in position to bounce.

They have to have a reason to bounce. It does not necessarily have to be that the economy is back on track, but it just needs some trigger to get the buyers back in near term. A lot of people are looking for a trading range. I noted that in my discussion of the VIX and how it is trading in its range even after that big selloff. It suggests that the market wants to bounce back up and that is what the “smart money” that sets the VIX is looking for.

Intuitively, I would say I expect a rebound in the market. We have picked up a little QLD, an upside ultra position. Of course we still have upside positions that are holding support and in position to move back to the upside. There is credence to the argument that the stock market could bounce back to the upside   even after SP500 failed to wow anyone on Tuesday with its rally back up into its range that it puked right back up.

The answer to the riddle of the bottom of the trading range has not come yet. There were a few more clues on Tuesday. SP500 showed it was still relatively weak thanks to the financials. The other indices not burdened by the financials look like they could try to bounce. If that is the situation, they may very well pull the SP500 back up in a bounce; indeed, I am still looking for an oversold bounce to come. That makes a lot of sense after this kind of selling. The one item that could torpedo that would be a belief by the market that the economic data is so bad that it will not get better. Despite what Bernanke said today, that is what it looks like, and that is why you have to be ready in case the market continues to sell.

I do not like playing the downside from here because it looks as if things are stretched too far. I would like to get more of a bounce and recovery, but we may still get more downside off of this SP action. If that is the case, we can play it to the downside. We will have an add-on SP or SPY play to the downside. If it goes, then we know that NASDAQ will likely go, so you could have an add-on to the QID as well. If you just want to play the QQQ short (in other words, buy puts on it) you could do that as well. I still think it might make a bounce to the upside. It has just stretched so far, and that VIX is something of an aberration if you are anticipating more downside.

Remember, at this juncture, any move to the upside has to be looked upon as a relief move   a rebound inside of a trading range. This is very choppy trade that failed several times to make a breakout or hold a pattern that was constructive for the upside. Therefore, the burden is on the buyers to come back in and push this to the upside. With the weak volume on the Tuesday action, I am not too encouraged that they will be able to rally it back up and keep it going. I reiterate, I will be looking at any bounce as a trading opportunity rather than a longer-term investment opportunity.

Some stocks may present themselves as a longer-term opportunity because some stocks will have the strength, the pattern, and the money moving into them. These could be the defensive stocks in healthcare and drugs. They will continue to move higher. That is a different story, and we will try to position trade them for longer term. Overall, however, you have to look at this as a trading-range move that will take it somewhere back into the range (maybe the top), and then it will likely fail again. That is just what this selling has shown.

We will be ready to take the play to the upside. We have some upside plays, like the SSO, and we also have the QLD. We can play the bounce as well. Remember, we will not load the boat. This is a very choppy time. We want to move in, take plays that have good risk/reward, and do not risk extraordinary amounts of money. Just use it to make decent amounts of money while the market sorts out what the next trend will be. It has not answered what that will be yet, but that does not mean we cannot make some money off of it. Have an outstanding evening. I will see you on Wednesday, and we will see just how the market reacts to this test and, in the case of the SP500, the breach of the lower support in its trading range.