- Relief rally picks up steam, has some momentum, but watch SP500 1295, the completed Greek vote, the FOMC decision.
- May Existing home sales hit a six month low as inventories jump
- Bernanke finds reality, once again, does not fit the Princeton model.
- Time Magazine cover ponders the economic negatives. It and the other sentiment indicators helping push the rally.
- Relief move at a critical point. Good leadership showing solid recoveries, but the sellers are preparing to try their hand again.

MARKET SUMMARY

A little momentum enhances the relief move, but it is still just a relief move.

The market relief rally picked up a little steam on Tuesday. It managed to post some good price gains on volume with very good breadth and decent leadership. The market was firing on all cylinders as it continued this move. It is the fourth day to the upside for the SP500, but that kind of success is not present in the other indices. They have been stuck in the mud. NASDAQ is just on its second move to the upside after struggling very much on Thursday and Friday. The SP600 is putting in its third or fourth day to the upside, and it is also working well. We have some leadership and a bit of volume. We have some momentum, but you have to watch out for “in your ear.”

What could cause those problems? First of all, the SP500 is at 1295. That is the bottom of the range. It stopped the index on a few prior occasions as it tried to recover. No fond memories for the upside at 1295. There was an initial selloff and immediate recovery to that level, but then it was slapped right back down. It came back looking solid and tapped the level again only to be trounced the next session. Now we have had a steady gain to the upside. We have had a breakthrough. We will see if this new look with a bit more leadership can make a difference.

What else could be an in-your-ear event for this market? There is the old saying that you should “buy on the rumor and sell on the fact.” We have had the Greek confidence vote for the Prime Minister. Everyone expected it to pass. If it did not, it would have been considered a calamity for Greece and the European markets that would ripple across the rest of the world. He won a vote of confidence by handful of votes, and now Greece should get its next round of funds from the European Union bailout treasure-trove.

The FOMC decision is out on Wednesday. The market has lately tended to rally into those announcements and has held up decently in the immediate aftermath. The thing is, afterward and since the market has rallied moving into the number maybe we get a selloff. There are sellers out there already saying that 1300 is the time to go short because the market has not been able to get through those levels. That is very true, but (and it is a fairly big but) things look different. I hate to say that, but they are. We have had a very sharp two-to-three week selloff, and now we are having a relief bounce to test it. It needs to come up and fill out this pattern. It needs to make that right shoulder to the potential head and shoulders pattern. In my mind of market symmetry, it would typically do that. Or it would, to some extent, make that shoulder whether it reaches the February peak or not. It may stall out at the 50 day EMA. It may stall out at this mid range. There are little gaps here and there at this level.

That is no great shakes to the upside from here, but it is a bit more. We are playing a bounce, so we are looking to squeeze as much as we can from this. Given the strength in the indices and the leadership pushing it up, I think there is more than just another modest bounce to the upside here. Does not mean there will be a breakout. It does not even mean it gets to that February peak, but we have some momentum to carry it a bit further. Another caveat is that momentum can be crushed by extraneous events. It looks like things are falling in right now to keep the momentum for the relief bounce in place for the next day or two. That should be enough to let us make some money on the new upside, close out some upside plays that recovered but do not look like they will continue, and pick up some new downside plays. An oversold bounce typically sets up more downside.

Intraday, stocks started higher and never looked back. There were gaps to the upside and a strong rally mid-morning. There was the obligatory attempt to sell off through lunch and the early afternoon, followed by a good recovery. The indices did not close at session highs, which is a bit disappointing because SP500 made it all the way up to 1297. That is significant when trying to break back over a key level. They did hold most of the move.

NASDAQ, +2.2%; SP500, +1.35%; Dow, +0.9%; SP600, +1.9%; SOX, +2.5%; NASDAQ 100, +2.15. Good, solid price gains. You would think the selloff must be over, but we all remember that selloffs in this case a pervasive, very tough selloff often result in very sharp, abrupt relief rallies. It does not mean the selling is over. It simply means you are having a sharp, abrupt relief rally as often happens in selloffs. We will see how far it goes. The market has the final say. We will have to see if the relief rally turns into something more. With the economy the way it is, I do not think that will happen, but I am open to surprises.

We have a bit of data with respect to the housing market on Wednesday. There are also crude inventories and the FOMC rate decision. The market is showing what it has shown in recent FOMC decisions, which is a move toward the release of the statement. Obviously the market is at a critical point because it has had a relief rally. Well, it is a bit more than that. SP500 is at 1295 and is starting to feel that resistance. We already know that sellers are saying it is time to get ready to short. That is true. This move probably will not last to a new high. It probably will not make it up to the February high. We do have something we have not had on the other attempts: some leadership, a little volume, and we have some breadth going.

The market was way oversold, it is making a bounce, and there has been a big unleashing of some of that pent-up demand or short covering. That tends to drive things rapidly higher. It also tends to dissipate rapidly, so we have to be careful. We will be watching the 50 day EMA. We will be watching the April high and the March high. We will, of course, watch the February high if we get up to that level. I am not counting on that. I am looking for somewhere in the middle of this range for the index to run out of gas and start to head lower.

At this point, we do not want to buy many more upside plays. This is a relief bounce. But I may be wrong. Maybe it will turn into a new high. If it does, I guarantee you we will make a lot of money. We already have some really good plays in position to move higher, and we will get tests that give us a chance to pick up new ones. We have good exposure to this rally. For now, it is only a rally and we want to take some gain as it comes in. CAT has been performing well for us. It is up for three days in a row now. If it puts in another good upside day, we might want to take some gain off the table. We will just have to watch and see where the market overall starts to top out and struggle. Then we will start taking some money off the table.

We will not get 20-40% gains on stock positions. 10% is a nice gain in this kind of bounce. In our option positions, we will not get 100-200%. 30-50% is a great return when playing a bounce, and that is what I am looking for. We will see when this thing starts to crumble. It has enough momentum and leadership to push it into the FOMC meeting and, I think, beyond. But we can only take what the market will give us. If it is not going to give us any more, we will take what we have at that point.

The rally is getting underway. It is looking good, but we do not want to get cocky. Do not think it will last forever. Let the rally run, but bank some gain when it starts to fade. I will see you on Wednesday, and we will see what happens in response to the Greek vote. Right now it looks positive. We will see if that can carry over into Wednesday and toward the FOMC meeting.

Jon Johnson