- Stock market attempting its best at a relief rally.
- EU considers a ban on short selling. Great. Attack the symptom, avoid the problem.
- Gold margin requirements increased, gold stumbles . . . but it closed well off of its lows.
- Unquestionably strong move, but volatility is not good longer term sign of market health.
- Same plan: ride a relief bounce to one of two logical resistance points, then prepare for more downside – - unless proven otherwise.

MARKET SUMMARY

Jobs report is the trigger as stocks try to rise out of the volatility.

The stock market is attempting to put in a relief rally, but the market is all over the map. The futures on Thursday were all over the map. They were positive very early, and then they slipped to negative on more European worries. They are considering a ban on short selling. That is a great plan: Attack the symptoms of the problem in the hopes that it will alleviate it. When you grab one side of a balloon and squeeze, it just pushes the air to another side of the balloon. I does not solve the problem; it only creates additional pressures. When it breaks, the party’s over.

There were more worries about banks going down. Rumors abounded that a couple of large French banks may be heading for a default in a Lehman-style moment. It is all rumor, but we have seen with Lehman how these things grow out of nothing. Other banks and brokerages just failed to do businesses anymore and had to close their doors.

The futures tanked but then recovered. Why? You can say what you want as to the cause, but initial jobless claims were below 395K for the second week in a row. But not really, right? The earlier number at 398K a few weeks ago was revised. We cannot take too much solace in this, but note that it is hanging around 400K versus 430K. There is improvement there, and the market seemed to like it.

The important thing about the number is that the market has been looking for a reason to rally. The stock market has been doing its best to put in a relief bounce after the torching it got over the past two weeks. It has not been able to make a move stick. Thursday after the numbers came out on the jobs, futures recovered and moved nicely into the open. Instead of tanking, they rallied into the open, had momentum, and the market continued up basically through the close. It was a very solid price day in the market.

NASDAQ, +4.7%; SP500, +4.6%; Dow, +4%; SP600 5.3%; SOX, +5.2%.

No doubt huge price moves, but no different from anything we have seen over the past few days. We had the dump lower on Monday. I would not say it was a cathartic move, but it was pretty much the crescendo move in the selloff. It took the SP500 and other indices down to the top of the summer 2010 base. Tuesday we saw a strong move upside. It looked like a reversal. Wednesday we saw the move given entirely back another reversal. I have seen more than a few cases where the market has sold like this and then has been able to rally out of this kind of back-and-forth pattern. Indeed, on Thursday the market surged back to the upside regaining those losses that it suffered on Wednesday. Volume was lower but still strong. You might say that the trade is waning, but it has been heading down as the market chopped back and forth. That is pretty good action.

In the short term this volatility may be a good thing, but it is typically not good in the longer term. Why would it be a good thing in the short term? When there is a trend in place, volatility suggests that trend is turning. We have had a very sharp 20% selloff, and a bounce up and down. This is the definition of volatility. Gains are given back and recaptured almost to the same point day to day. Upside one day, down the next, and then back up. Volatility suggests a trend is changing.

It is that weather analogy I talk about a lot. You go through summer, it is hot, and you have the pattern down here. On the coast you have a 20% chance of rain every day although not this year. We are apparently in a heat shield and are just baking, but in general that is the idea. It is the same situation now; there is just no rain. Heat every day. Then when the fall rolls around and the fronts start coming down, you have volatility. You alternate between violent storms and then nice, calm days. Not every day like the market is doing, but you get the idea. That suggests a change is coming. The earth is heating and cooling differently as it tilts on its axis, and therefore the weather pattern starts to change. That volatility tells you about change, and the markets are the same way. When we see this volatility after the selloff, it suggests that the market is ready to bounce to the upside.

Longer term is it a good thing? Not really. The bulls and bears are beating the crud out of each other every day. Right now they are evenly matched. There has been a selloff. The fact that they are not selling lower suggests that the buyers have stepped in to try to stem the tide and maybe even bounce the market. Typically you would expect a relief bounce as I have been talking about, a move up to the November levels. It has already crossed into the lower level of the November range. It gave it back on the close, but it is there. Look at the mid-range and then the early-November peak which is the top of that pullback.

That is one potential resistance point at 1225-1230 on SP500. The next would be up to the March and June lows which roughly would be about 1260. Very important levels. You can see it consolidated there late January. It bounced in late December and early January. It tested it again in March and twice in June. It is an important level. That represents the neckline of the head and shoulders that formed in the SP500. If it makes it back to that level, another 90 or so points higher, that would be a prime candidate for a rollover if it is going to occur. I think it would.

Volatility like we have seen from February into July after steady move up through the fall and spring suggests a change. Now we are seeing volatility at the bottom over support. That suggests a bounce. After that, I am still of the opinion that the volatility on the top will control and send the market back down. That is unless we get, number one, some much better economic data and a few extra jobs here will not make the difference. Two, we get some kind of policy move either by the Fed, the Congress and Executive branches agreeing, or some combination of the two. That would be something of a game changer if it occurs.

We learned yesterday that Art Laffer has met with the Obama administration. They requested him to meet with them and talk to Austan Goolsbee to see what he would suggest. Of course he suggests all the things that Reagan did, which is exactly what this economy needs. There is not a snowball’s chance in hell that this administration will agree to do any of that. We are talking tax cuts for corporations, tax incentives, and many other things the President has already said he wants the opposite of. It just shows you how desperate the administration is to find an answer if they even consider talking to a supply-side genius such as Art Laffer.

Jobless claims came in at 395K versus 409K expected. The prior week was originally revised up from 398 to 400K. That was revised up again to 402K. It is a slight revision, but they are staying around 400K versus the 420-430 that they slammed into and could not seem to get away from. Is this what drove the rally, this humongous 5% move in stocks? No. It was the trigger. Remember, I was saying the market wanted to make a relief bounce after getting torched for two weeks. It was having a hard time finding its footing. Or it would find it and then get chop-blocked like what happened on Wednesday. It was looking for a catalyst to send it higher, and the jobs report did its job (so to speak).

There were also some earnings from CSCO. It came back and posted some decent recovery after everyone figured John Chambers should be sent to the guillotine. It was not that bad, of course. It gapped higher and closed over the 50 day EMA. That gave the market a shot in the arm. If CSCO can turn it around, then so can stocks in general. That is exactly what they are doing. An interesting feature on this CSCO chart: As it made a lower price low in June, MACD made a higher price low. As it made an even lower price low in August, MACD made an even higher price low. Very telling. The momentum was swinging a bit, so we get this gap higher that looks a bit better.

Jobs acted as a trigger, and that sent the market higher to those impressive gains. It was one of those days where it just closed out at the highs. Very strong upside move, but as noted, we have seen that before. It is nothing new for this market. Look at these evenly matched sessions the past three days.

FRIDAY

Friday we have some important economic data before the open. Retail sales hit. We get Michigan Sentiment and business inventories half an hour in. Sentiment is always important because we want to see how people are feeling. If they are feeling good, they will good out and buy. That is the theory, anyway. Retail sales are another everyone watches because we are or used to be a consumption society. I know we are doing our part to end the recession in my household.

In any event, there is some important data out there, and it may have some impact on the early action in the market. We are looking for a continued bounce overall. We have had a down day, an up day, and the rubber match is to the buyers. We will see if they can push their advantage and continue the bounce to the upside. We anticipate that rally to the November peak as the lower side. I would like to see it go out to the March and June lows near 1255-1260 on the SP500. That gives us a nice upside rally. We can make plenty of money off of that with our upside plays we have in place. We will be quite happy to ride our positions to the upside.

That is our plan, and it is nothing different from what we have had since we saw this set up. We have bought into plays to the upside, and they are bouncing. We are riding positions that we have had that got tagged. We will let them recover and see if they can reform their patterns and break higher. If they just bounce, struggle, and then start to stall, then we will take them off the table at a higher price then when they were on the dump. Then we will look for downside plays as the market moves higher. We see a lot of those bear flags forming in many stocks as they recover off the lows. Those will present opportunity to the downside when the relief bounce runs out of gas. I am hoping this bounce lasts 3-5 days to the upside. That gets everyone going back up and feeling good about the market, and then it will turn over on them. We will make money on that move. I would love to see a good move like that. If it stalls, we will pack up our bags to the upside and play the downside.

We have a few downsides left. They are bouncing up toward gap points and the 10 day EMA. If they stall there, we keep them. If they continue to the upside, we will take the rest off the table. We have just a little bit left in those because we have taken a lot of gain on the way to the downside. That is how you play it. You take gain on the way down, logging in bigger increases. Then you have a little bit left and you just let the market take you out if it is going to do that. It may turn and fall right back down.

The plan is to let the stocks ride higher, and then play the downside when the relief bounce runs out of gas unless, of course, it proves otherwise. It would have to pull the rabbit out of the hat to do that, but I do like a good magic show.