- First bounce fails and fails big, but a big second bounce sticks as the downside streak ends.
- Market recovers, showing all the indicia of a reversal, but investors keep looking over their shoulder.
- ADP report bolsters hopes for Friday jobs report, but with this GDP rate job creation is difficult.
- ISM Services misses, falls closer to breakeven.
- Factory orders top expectations, falling ‘just’ 0.8%.
- Uncertainty is an issue no doubt, but the CERTAINTY of a continuing weak economy is much more negative for businesses.
- Was this a key reversal? Playing for a bounce but the market needs better data or the promise of some stimulus.

MARKET SUMMARY

Good reversal but not impressive, or more like not convincing to selloff weary investors.

You knew it was going to happen: a rebound after the 7 days of SP500 selling. Futures were up, though just modestly, early in the pre-market session. After a better than expected ADP private payrolls report (114K versus 100K expected, though June was revised down to 145K from 157K) futures improved even more. MA posted quite impressive earnings and had a bead on a breakout move. Garmin, however, reported weak sales and a weak outlook. GPS devices are everywhere now and there doesn’t seem to be a need for those stand alone models. Hope it doesn’t give up its sponsorship of its cycling team. There I go again.

That did not dampen the ‘enthusiasm’ for the upside as stocks opened higher. They immediately stalled, however, then managed to rally modestly into the 10 a.m. ET ISM Services report. The report came out and the market jumped in relief that it was not worse (52.7 versus 53.7 expected and 53.3 prior). Stocks rallied . . . for about 3 minutes. They then reversed and the selling started.

We monitor a lot of trading floors and trading rooms during the day. There was panic in several places. It was real, colon-tightening selling. The market sold for over a week. It tried to bounce, it got more bad economic news and then rolled over. The indices undercut prior lows, support levels, etc. (though NASDAQ rather easily held above its June low). Leaders sold off hard, slicing through support. It is the kind of action that suggests the market is giving up on the economy and hope of a Fed bailout.

What did we do here? Sold a position or two that were bugging us in the way they were acting and the sector they were in, then focused on the downside plays and picking when they were going to be ripe to take gains just as if the market was rallying upside and we had upside plays running to peaks after a strong prior run. The focus was on maximizing the gains in what we felt was a final hurrah in this leg of the selling. There was no guarantee it was, but after 7 downside days with this one being the eighth on SP500, the selling we heard in other trading rooms, and NASDAQ holding over its lows it felt as if a rebound would come.

The turn came and as is often the case, it came just about midmorning. The indices ripped through one low or another, again noting the exception of NASDAQ, and then turned. The initial move was solid, but after that it was no straight upside shot. Stocks spent the rest of the session working higher, testing for an hour or so, then working higher again. By the afternoon session they finally topped the morning highs. Even so it was still a slow climb into the close that just barely brought the NYSE indices back to positive.

Volume was up and after huge turns in the indices (72 points on NASDAQ, 25 points on SP500, and 196 points on DJ30) they all closed positive. That is the signature of a key reversal. Nonetheless, it was a nervous reversal. Slow moves that always had the look that, as was said in ‘The Shawshank Redemption,’ if they heard a loud fart they would roll right back over. They didn’t, however, and on the close there were gains, some good and some modest, across the board. Leaders posted impressive reversals from the lows as well. It certainly looks as if the market is going to put in a relief bounce in the range near term, and as the turn occurred we banked some more downside gain and transitioned into some upside plays to take advantage of the reversal. Now we see if they can make that move.

NASDAQ 0.89%. SP500 0.50%. DJ30 0.25%. SP600 0.70%. SOX 1.12%.

THURSDAY

A day closer to the jobs report and the weekly jobless claims are another warm up for Friday. A few earnings here and there will spice things along with the odd rumor about further stimulus from the Fed.

What is controlling right now, in addition to the wildcard of a crazy story out of DC or Europe, is the technical pattern. Sharp selloff for 7 to 8 days straight down, a break of support, an intraday reversal back into the range. That has set up the potential for a rebound in the trading range. It is there, it is ready. Many stocks mirrored this action. We entered some upside and banked some downside gains as per the plan. Now can the market make the move of was this all just a big exercise that rolls right back over.

No guarantees; there never are in the market. What we have, however, is a technical pattern that provides very good risk/reward: if it works you make great money. If not you don’t lose much because the support is close and if it does not hold you are out relative quickly. That is the name of the game.

That said we didn’t really like the recovery action. It was is if the market was looking over its shoulder all the way back up. It made the move but it was not a clear, Superman kind of surge. That leaves us a bit concerned, but after this kind of selling when are you not? Your gut is telling you ‘no’ but you have to go with what the market is doing. That makes the risk/reward, the entry point, so important in any type of trading.

The jobs report is another concern as it could truncate any upside move if the data is worse than expected. The market is still very news oriented as seen on the ISM, the President’s addresses/press conferences. Of course the hugely watched jobs report makes it a very important market event. Thus while we did pick up positions Wednesday, if we get a good run Thursday we will consider banking some gain ahead of the close. That is how key the jobs report could be.

For Thursday we are still looking at potential upside plays if the market is going to continue the reversal. We have some good plays in position already and picked up several Wednesday on that reversal. Thus we don’t plan on going overboard as we are already well represented heading into the report as it stands.