- With the indicators all lined up, stocks bounce. They needed a carrot of sorts from the Fed, but the technical position won out.
- Gold may finally take a rest.
- Fed leaves rates at 0% . . . forever.
- Fed trying to punt past the election and leave the stimulus task to Congress.
- Indices show a big reversal bar suggesting more upside on this relief bounce.

MARKET SUMMARY

Technical indicators line up and market starts a relief bounce from impressive selling.

On Monday I said that the technical indicators and the contrary or sentiment indicators had lined up in a row. They were suggesting (almost screaming) that a rebound was in the offing. The VIX spiked to highs not seen since last summer when we had that bottom in the market that turned into a rally thanks to QE2. Speaking of QE2, the indices had given back all of the QE2 rally, coming back down to the tops of the summer 2010 base that set off that rally when QE2 was announced. I also talked about how the new lows screamed to incredible levels. It was almost 1500 on the NYSE. The advance/decline line was -11:1 and -15:1. Incredibly extreme numbers. When they all line up technical, internals, and sentiment indicators you tend to get big moves. That is exactly what happened on Tuesday.

We had a snap-back rally in the market that showed a very good reversal bar off of this strong selling. It suggests that there will be more upside. Does it mean there will be upside that miraculously breaks to a new high and sends the market to nirvana? No. It does suggest we will get a relief bounce off of the selling, and likely a very tradable one at that. Maybe back to the November consolidation level or even up to the neckline of the SP500 head and shoulders top. That would be a very nice tradable rally indeed. Of course we were buying into that move which was our plan. We were also taking a lot of gain off the table on other positions such as the SDS. It has made us good money. The QID is excellent. I am talking about 300% gains on the SDS and a nice 75% or so on the QID, pulling it out of the hat after it boxed us around the ears. A head and shoulders, but it was a hedge after all.

We took nice gain, but also moved into positions that started to the upside, some of the name brands we had been planning on moving into. AAPL was breaking to the upside. POT was breaking nicely off of what looks to be a false breakdown, reversing. And that is the way we were looking at things all day. It was part of our plan. Bank some gain and then turn and play the upside. Then when the market hits and stalls out, we will bank the upside and turn and play the fall to the downside.

The one thing that did not happen was getting that further washout to the downside at the open. That really would have been nice. Instead we got a stronger open out of the gates and the stocks rallied. Of course we then had that FOMC meeting, and the market flatlined in front of it. When the news came out, it really went to the downside. Why? There was no immediate announcement of a QE3, which is what the market was hoping for given the pathetic (dare I say hideous?) economic data coming out despite that Friday jobs report. It does not really show anything at this point. If the economic numbers continue as pathetically as they have been, there will not be any hiring. That will be the blip to the upside.

We had the Fed leaving interest rates at 0% basically forever. It said it is leaving them at zero until mid-2013. It is as if the Fed is responding to the arguments about uncertainty saying, okay, we will give you certainty with respect to interest rates. As if we did not think it would be the case. They just put it in stone that nothing is happening until then 2013. You could have inflation running crazy or whatever, but the Fed will not care. …Supposedly.

Notice that it is 2013, so the Fed has punted the ball back to Congress. It is moving its action back behind the 2012 elections. It is taking itself out of the political arena if it can. It wants Congress to handle this. They have to come up with fiscal stimulus that makes sense. Not any of this pump-priming nonsense or Keynesian voodoo that, once again, does not work. Of course the proponents would say we just did not spend enough. They want to throw more money down that rat hole. They fail to see that what the Fed is talking about is really stimulus. The kind of Ronald Reagan/Art Laffer stimulus where you invest in the U.S., but none of this nonsense about giving people back money who never paid any taxes. No. It is talking about entrepreneurs. Making an environment conducive to have venture capital money come back into the market and help fund these great new ideas that the U.S. always comes up with.

That is how we started the semiconductors revolution, the PC market. We had the guys in garages like Steve Jobs and Mr. Wozniak. We had people like Bill Gates and Steve Ballmer in hotel rooms and garages coming up with the companies and ideas that led the technology revolution. The semiconductors silicon revolution. We need to get back to that and be able to fund those businesses. That is where the jobs come from. That is the real stimulus. No one needed a personal computer. Do you remember when they came out and people were saying why the hell would anyone need a personal computer? I remember that like it was yesterday. I remember guys looking me square in the face when I said the early Macintosh only had 128K of RAM, and they said, “Why would you ever need more than 128K of RAM?” Even I knew at that point that there was much more potential in this than just running a spreadsheet that could add, subtract, multiply, and divide. The U.S. is the incubator for great ideas, but we need the money to fund those ventures. That is the stimulus we really need. We need to bring the money back into the country. I know that was long-winded, but it is so important if we are ever going to recover. That is what will have to happen.

As we have seen, the Keynesian stimulus did not work. We are getting worse. As we have seen, the monetary stimulus from QE1 and QE2 did not work. We have given back the entirety of the QE2 rally, and it was gone in the wink of an eye. What took seven to eight month to accomplish was gone in less than three weeks. Liquidity helps get things moving; it is not an end in itself. It is not economic growth. You have to have policies that foster the incubation and germination of these new ideas, and it is just not happening. And that is what the Fed is saying. Congress, Executive: Get it together because we cannot do it. That said, the Fed did also say there are other methods by which it could assist the economy and add stimulus. It would use those “if necessary,” but it is backing off. It is trying to say they do not want to do this. If it does, we will have major problems with inflation.

When you look at the other markets, they had issues with what the Fed did. Not because it said no Quantitative Easing right now even with that, they still had problems. But let us talk about the market action did first. Looking at the stocks, that move higher gave it almost all back on the session. It was an ugly run. Turned over, but it made that nice move after it figured out it can live with what the Fed did. Was that really the reason? Or did it just finally get the washout we were looking for earlier in the day? It got that lower low. It undercut this range of support and then reversed. That false breakdown that we love to see. It could very well be what happened. It was a technical move. The indicators were lined up, and it was ready to rally. It finally got the shakeout. That was after the Fed came out with its proclamation and it reversed. After hours a lot of the pundits and political analysts were saying the market rallied right back and everything is fine. No. The reason it rallied back is not because everyone is applauding what the Fed did. The market was set to move. It needed a washout, and now it is making a technical rebound.

I do not think this will not go to a new high. It may do that and make me eat crow, but if it does, that is okay. We will make a lot of money doing it because we are playing the upside. We will take partial profits along the way at logical points, but we will also let them run to other logical points where you get the really big gains. If it continues to run, we will continue to make money and continue to add good positions as the market shows it is time to do so. I do not think that will happen, but I do not control the market; we will just be ready when things top out. They could turn over tomorrow for all I know, so we will be ready just in case. This is a volatile market (as if you needed me to tell you that).

We got a rebound that kind of waffled, but really kicked home in the last half hour. NASDAQ, +5.3%; SP500, +4.75%; Dow, +4%; SP600, +6.2%; SOX, +4.6%.

Impressive moves across the board, but that is what happens in these bear market selloffs/bear market rebounds that I think we are seeing right now. You have tremendously sharp selloffs and tremendously sharp reversals. That is nothing new or out of the ordinary. That is just the way it works when the market is selling off in anticipation of a weak economy.

WEDNESDAY

We do not have to worry about the Fed anymore. For the week, we will just talk about mortgages, wholesale inventories, crude inventories, and the Treasury budget. Pretty mundane stuff, and nothing that will rock the markets. Now we have a real technical move taking place. Technical indicators have taken over right now. I feel they will always there, but it just often takes a news story or a fundamental story to trigger the move.

The technical pattern was in shape. It just needed that final washout, and now it is trying to bounce. The key is how far it will bounce. As I have already pointed out, there is close resistance in November. We have to watch that. It would be at the bottom, the middle, or the top. I am very concerned about the middle and the top. It could make it up to 1260, and that would be a great relief bounce. Do I expect anymore? If it gets there, I will be very happy. Remember that the initial relief rally from late June went a lot farther than we thought it would. We made a lot more money than we thought at that point. That is why you take partial profits and let other positions run.

It made the move, and now it has made the move down and we are bouncing to the upside. We will ride it as far as it will take us. We have bird-dogged a few more stocks that look good. We will also have some downside plays. There are not many right now, but GLD is one to consider. We will be looking for others to the downside. Although it may be early, you have to have those “just in case” plays. What if bad news hits? What if the market just runs out of a bid again and things are really bad as far as the market perceives it. Then we have to be ready to make the downside play again.

Right now I am anticipating riding our current upside positions higher and looking for at least better exit points on them. We will ride the new ones we have just taken the SSO, DIA, AAPL to the upside to make a quick relief bounce gain off of them. If the market gives us more, we will let it. I do not anticipate that, but we will let the market show us which way it wants to head. Then when it gets up to a resistance point and stalls either at the November levels or all the way up to 1260 on the SP500, then we will be ready to close them out and play the downside.

That is the game plan for now. We have such a horrific breakdown and no real change in anything monetary policy, fiscal policy, or regulatory policy out of the administration. I do not know if the market and the economy will be able to heal themselves, and thus we have to be ready to play the downside. It was a nice rush upside. We will make more money. We banked a lot of great money today on our downside plays, and I hope over the next couple of days or maybe three days or a week we will be banking some solid upside gain and getting ready to play the downside if the market shows a stall.

We will see what happens on Wednesday in the never-ending up and down of this market. It is not as crazy as some people say. There is a method to this madness as I pointed out on Monday. A lot of people after hours on Tuesday were saying it is just a crazy market it is down 500 points one day and up 400 points the next. There is a method to the madness; you just have to play the method. You have to ignore the noise, play it, and you will be fine.