- Tuesday reversal continues through Wednesday as Europe clams down, for the day.
- German courts given bailouts the nod as Greece and Italy take austerity ‘action.’
- Same story: some companies see improvement ahead, some see decline ahead.
- Fed Beige Book mixed bag but leaning more toward slowing than improving.
- Tax revenues at 14% of GDP show this is no recovery.
- Good start to third bounce attempt off the same support. Very interesting, but still just looking at this as a relief move to the June low.

You know it’s a bear market when you are down 3% one day, up 3% the next.

Friday SP500 lost 2.5% and Tuesday it was down 3% before it reversed to close with modest losses. Wednesday SP500 was back up 2.9% as the Tuesday reversal proved to be no one-day wonder but a solid reversal, once again, off of the summer 2010 base highs. Solid is relative. Great breadth at 6+:1 on NYSE and 5+:1 on NASDAQ. Volume, however, was poor, down sharply on NYSE and up marginally on NASDAQ, both exchanges putting in below average trade.

So it was no breakthrough in terms of strength, but as with the other bounces off the summer 2010 base it looks to have some legs to make us upside money back up to the November 2010 peak hit on the last move and likely onto the June low at 1260, another 62 or so points to the upside. Accordingly we entered several plays that set up those near term bullish bottoming patterns, the small inverted head and shoulders and the short double bottoms, that were breaking higher Wednesday.

NASDAQ 75.11, 3.04%. SP500 33.38, 2.86%. DJ30 275.56, 2.47%. SP600 4.10%. SOX 4.47%

Stocks continued the Tuesday move with an opening gap and then ran higher all session to the close, ending at session highs in a show of buyer strength. Sellers were nowhere to be found, not daring enter in this bear market bounce. Moves in bear markets are sharp as are the turns. Looking at the SP500 chart you can see the prior move showing a big selloff and reversal that really launched SP500 to the November 2010 peak. Big 40 point intraday reversal. Tuesday a 25 point reversal from low to close. Big moves both ways as the buyers and sellers fight it out.

The near term looks to be another upside run as noted above. Volume is not great, but as with the other moves we are not looking for a breakout here. Perhaps the market does; some today were calling this a bottom and given the indices are trying a third bounce off the same support it looks as if they have banged out something of a floor to rally. If it goes further, great. We make a lot of money. If it does not, that is okay as well because we will make money and then play the downside once more. There are issues with this move: the lack of volume noted and also leadership lying mostly in defensive stocks such as drugs and consumer products companies such as Clorox. There are some growth names in the mix, but most of what we are seeing are stocks coming off sharp selloffs, rebounding in relief similar to the indices.

THE NEWS. The stories driving the action.

Germany: The country’s highest court ruled that the bailouts were constitutional, clearing the way for Germany to continue its participation in the bailout attempt. Good luck.

Greece, Italy. World stock markets heralded the ‘action’s of the two companies as they implement their austerity plans. Well, sort of implementing. In Italy there was no action on implementation, just another vote that sets up the final vote to approve the latest austerity plans. You see this and wonder why on earth would markets pick this as positive. Perhaps, just perhaps, the pundits are as confused about it as well and just play pin the tail on the reason for the rally.

Earnings. I have talked about the dichotomy in the economy between big corporations favored by the administration with subsidies and giveaways that help them create modern day monopolies by blocking market entry to any potential smaller competitors. You can see some of this in the earnings outlooks as well, e.g. UTX saying things were rosy and upping guidance as other smaller companies say they don’t see anything positive.

Wednesday it was OMX downgrading its outlook on soft small business sales and weak back to school sales. OMX joins SPLS as another small business retailer lowering its outlook. At the same time NVDA comes out and raises its outlook. Of course it is a NASDAQ 100 company. Not a specially favored company such as GE, GM, and others, but benefitting nonetheless from the large corporation bias.

Federal Reserve. Two items. Once again Chicago Federal Reserve President Evans called for more Fed stimulus including, similar to the low rate commitment through 2013, a commitment to hold rates low and provide necessary stimulus until unemployment falls to 7.5%. Inflation? If it is only ‘temporarily’ higher then who cares, right?

Second, the Beige Book came out and the majority of regions showed slowing growth (7 out of 5). Moreover they downgraded their outlooks. That does not sound as if the economy is in recovery, certainly not a second ‘summer of recovery’. Second summer of eviscerating the small business heart of the country? I could buy that.

Tax revenues tell the story. To drive home the point that there is no recovery as we have been told, take a look at the tax revenues the federal government collects. Historically, regardless of the incentives, tax revenues tend to trend at 18% of GDP. Right now, after all of this ‘recovery,’ tax revenues are at 14% of GDP. Huge decline and of course a reason for the deficits, or partly so. In good times more programs are started that won’t be paid for in the bad times.

This raises an important point: the key is not revenues as they historically hold at 18%. The key is spending. You cannot ‘revenue’ your way out of US-sized deficits. I have written before: you could take 100% of the profits from the Fortune 500 companies for 10 years and not come close to paying off the debt. You could confiscate all the wealth that is left here in the US and blanch when you realize the real entitlements are over $200T it is easy to see there is no way taxes will pay off the hole dug by our leaders on both sides of the aisle.

THURSDAY

The usual suspects in terms of economic reports, namely weekly jobless claims. Consumer credit will be interesting as it comes out at the market close. Not a lot of impact though the weekly pool is out on whether jobless claims fall below 400K or not. It is a sick joke, the longest running one in the history of the US post-1930′s.

The US story, as bad as it is, still does not dominate the stock market moves. That would be Europe. Wednesday things were rosy, at least on the headlines, with respect to the continent and stocks rallied unfettered. Europe is a wildcard just as much as the Fed and some new stimulus. There is also the President’s ‘major’ address on the economy. Some were claiming the rally was in part based upon what Obama may say Thursday. Not really. Investors know the likelihood of Obama offering something profound is remote, and if he does, the likelihood of it being passed is virtually nil. There will be a lot of pomp and ceremony but it will be for nothing other than to set up a campaign argument for the re-election run, the most important thing in the Administration’s future.

Whatever the reason (and do we really care?) the market is making its third run off of the August lows that formed right on top of the summer 2010 base. We are using that for another relief rally, not anticipating a breakout move. Thus we entered positions on Wednesday and have some more plays for Thursday, but we are not going to be as aggressive in moving into new upside positions. Take them if they are there, but not chasing.

Indeed, a soft open would be nice, allowing the move to develop versus a gap higher. If there is another gap we likely have to wave goodbye to a lot of plays and ride what we have. That will make us money just fine.

Given we view this as another relief move (look at volume and leadership as noted above) we are not looking for a breakout and thus as the rally matures or extends we have to be ready to lock in some gain and have some downside plays at the ready. We have some continuing plays to the downside at hand if needed, but we also believe there is more upside on this move as outlined above. Again, the move can continue farther than we think, would be the first time, and if it does we will gladly let it make that run.