- Market pauses ahead of FOMC, fades after Bernanke downgrades Fed’s economic outlook.
- Earnings start back up and show the dichotomy in the economy.
- Bernanke a bit more downbeat about the economy, but is hands are tied without some kind of spending reduction by Congress.
- ‘Transitory’ causes of the economic slowdown are not all transitory.
- Lick log session: will the indices rebound and continue the rally or was 1295 a rally killer once again?

MARKET SUMMARY

Investors sit on their hands ahead of FOMC, sellers enter after, but not that powerful.

After a run upside as on Tuesday it is natural for stocks to step back and digest some gains. That the FOMC was announcing its most recent decision in the afternoon, the lull is understandable though in recent decisions the market drifted higher into the announcement. I guess you could say that was the case Wednesday: stock futures were lower but they did recover to positive ahead of Fed announcement. Not enough to get anyone excited but at least they recovered.

Futures didn’t have any real reason for the lethargy. The dollar was up modestly so that had its usual negative impact in this backwards, export-oriented economy. Greece gave its PM his vote of confidence; wonder if that will turn out as it does in US football, i.e. the coach getting canned the next week. Greece will get its money so all will be resolved. Yes, the market was buying that one.

Earnings were out and not bad. They were not good either. FDX beat expectations by 3 cents and revenues topped expectations. It also voiced a positive outlook, and importantly, noted ‘subsiding cost headwinds.’ On the other hand Phillips, the big European electronics company, reported that demand was weak in Europe and indeed all its markets. One positive, one negative. What is the difference?

FDX is in big corporate bailout US. It is part of the exporting ‘success’ story that a low dollar and federal backing has created for the big multinationals. FDX is right in the midst of that category, helping ship a lot of those goods. It is feeding off of the success of the exporting companies. Good for it, but that is hardly good for the rest of the US economy, the meat and potatoes small business sector. You know the one, the sector that cannot get any of those loans earmarked for the group because banks prefer to take their free money and ‘invest’ it in Treasuries for a guaranteed return versus earning the money by making loans.

Phillips is experiencing the harsh reality of a weak consumer suffering from too few jobs, too many layoffs, too few opportunities, and according to ECRI, little hope for any improvement as the slowdown becomes ‘pervasive’ over the next few quarters. Plenty to look forward to and consumers are avoiding the Christmas rush (or is that ‘winter holiday’?) not buying now.

Which is closer to reality? They both epitomize the problem. The multinationals are leaving money overseas when possible because of governmental policies. Consumer related companies are feeling the pain along with the consumers. Meanwhile the government, confused as to why its Keynesian policies are not working, ponders how to force those companies actually benefitting from its policies to hire workers those companies have no intention of hiring. Good luck!

With that backdrop, no wonder FDX’ earnings failed to inspire the market to any continuing upside at the open. After that slow grind to positive the indices waffled and sold negative, but it was not a rout. Small victory, but it was a change from the prior trips.

NASDAQ -0.67%; SP500 -0.65%; DJ30 -0.66%; SP600 -0.75%; SOX -0.47%. Pretty even across the board.

On the other hand, it was not a situation where the indices were diving lower after SP500 hit that magical 1294-95 level. Softer but not tanking. After the prior couple of revisits to that level that resulted in a sharp selloff, anything short of that kind of reversal was almost a victory in itself. After the Bernanke talked in the afternoon and didn’t provide anything new, there was no reason to go out and buy.

Did the sellers come out and shove the market lower? No, it was more of a lack of buyer interest. After the strong surge Tuesday that was, as noted above, understandable. They shot up a lot of ammunition and a pause is normal.

The question is whether this was a pause before a new move higher in the relief rally or the turn back down for more selling, once again foiled by SP500 and the 1295 level. You can make arguments either way. SP600 tapped the 50 day EMA and faded. SP600 moved further over 1295 (1298.61) and reversed below to close. NASDAQ is still below its old trading range. On the other hand, very modest losses, low volume, leadership still in good shape to move higher.

What to do? We played the field. Took some interim gain on several positions taken on the bounce, not huge gains but we didn’t expect big gains, just some nice additional profit. We also hedged by picking up some new downside. Yes I feel there is still the potential for some upside here but what I feel takes a back seat to what the market actually does. Thus when there was some gain to take after a surge we took some. If the move continues upside with further relief, great. We will let the rest of the positions run and look to bank more gain and also position for the next selling.

THURSDAY

Initial jobless claims before the open and New home sales a half hour into the session. Both are significant reports. The market can use a boost from them as the indices test back after a strong Tuesday surge. Will they provide the boost? Even if jobless claims are over 400K, if they beat expectations they tend to help as they did last Thursday.

As noted, the market relief rally cannot afford any further significant downside. A softer start has to be met with buying. A stronger start needs to fend off sellers. Important day indeed for the life of the recovery rally. Still do not believe it results in a new serious rally, but there is room for the upside to at least set up better downside patterns if that is going to be the ultimate result.

This pullback may give some cover for an upside play or two in order to try and capture some more upside on a continued relief bounce, but I don’t want to get strung out on too many new plays. The upside taken over the past week are yielding modest gains at this juncture and of course a further bounce enhances those returns but it is a narrower window of opportunity at this juncture.

We are more inclined to let current positions move higher if they will and bank more gain when they slow as has been the plan. Also looking at loading some more downside as they set up with a further bounce. Took some downside on Wednesday as they plays showed themselves. A bit more rally and we will have more positions to add.

As you can surmise, still anticipating more selling after this bounce whether it continues upside from the Wednesday close or just gives it up once more at SP500 1295.