SUMMARY:
- This Tuesday the market got the additional downside and reversed.
- Same old stories and plenty of gloom send stocks down early.
- A gloomy Bernanke tells Congress the recovery is faltering and the Fed is ready to help if appropriate.
- Bernanke’s promise to add stimulus if needed hurt the dollar, just as he desires.
- Factory orders fall but business spending rises.
- New lows spike and then volume surges on the reversal.
- SP500 reverses, but NASDAQ, SP600 and even DJ30 look stronger for a continued bounce.
- A bounce looks likely, but with this economy it likely won’t be a game changer.
- Earnings are coming and could disappoint: a rally to the results and then a return to selling?

A further selloff gives way to a reversal. Step 1. 

Tuesday the market gave what we were looking for. One of the scenarios discussed on Monday was that continued selloff followed by a reversal to positive. The news was not terrible in the morning; it was just more of the same. GS said that it was downgrading its analysis and prospects for the economy. It is lowering its expectations for gold, copper, oil you name it. There were also the usual worries out of Europe. This time Germany’s Deutsche Bank said it will miss its earnings expectations. That was generally a downer for the stock market. This was on top of worries about whether China’s economy was slowing rapidly or maybe hitting some kind of sustainable, soft landing. Those question marks are the bane of the market.

AAPL had an iPhone announcement that did not exactly please investors. It came out with the 4S instead of the iPhone 5. It had some improvements on it, but there were no new devices released for the first time in a long time. AAPL sold like a stone but managed to rebound. As AAPL rebounded, obviously the market rebounded as well.

Looking at the intraday chart, futures were down early but were recovering into the open. That had me concerned that the market may not be able to continue to the downside and give us that good washout. As soon as the market opened, however, it did turn and wash out. It was down significantly. There were some big losses that saw the Dow swing 300 points on the day. There was a recovery, but it was not a done deal. This is what concerned me about today’s action. There was a reversal which is what we were looking for but it was not that big blow off and then a reversal whoosh back to the upside. There was a move back up to positive, but it gave the move away by late afternoon. It took a tremendous last-hour surge to flip all of the indices back to positive.

SP500, +2.25%; NASDAQ, +3%; Dow, +1.5%; SP600, +6.7%; SOX, +4.25%.

Very strong upside moves but, again, it was not that whoosh to the upside. It was a kind of double take. Positive from negative, and then back to negative before a last-hour rush brought the indices back to positive. What caused it? There were a lot of stories playing pin the tail on the rally. Some said it was an afternoon story on the FT wire, and that may have some veracity. That story talked about Europe coming up with a new way for Greece to make its requirements under the bailout, and that helped ignite stocks from negative back to positive. That is what gives this move a big question mark. That is, it was rolling back over before Europe intervened, so to speak, and pushed the market back to the upside. Even Bernanke’s mid-morning testimony did little for the market. He was very dower about the economy. He said that the recovery was faltering, there was anemic employment, depressed confidence, risks from Europe many things causing the economy to almost hit stall speed.

It prompted him to say that, if necessary, the Fed was prepared to take further action in order to prevent a selloff. He did send a warning to Congress and the administration that they should not cut spending too rapidly lest the economy stall and the recovery stall further. The funny (and sad) thing was Bernanke said you have to avoid actions that could impede the “ongoing economic recovery.” It is a pretty anemic recovery, as he noted, and it would not take much to impede it. Maybe that is what he is worried about.

He did not come out and say that the President’s jobs plan would actually work and bring about jobs. He did not say, “Pass the bill” as we have heard the President say so much of late. He just said that we needed to not cut spending so much that we had a problem. Maybe he is right in the near term. If you do cut too much, look what happens. Greece has austerity but it also has a crappy economy. If you add austerity to a crappy economy, you slow the economy even more and your budget deficit balloons. Thus, yesterday we learned that Greece will not be able to make its 2012 budget deficit targets. The thing about Mr. Bernanke is we know he wants our money. He wants the dollar to deflate, and the dollar did depreciate on the session.

WEDNESDAY

We have a bit of jobs-related data with the economy data. It is all economic, I suppose. Some of it is more forward-looking like ISM services versus the jobs which are a bit lagging. We will see if Challenger job cuts are rising or falling. They are expected to rise. They rose last month and are expected to rise again. Not a great indication.

We will see ADP employment. It is expected to drop to 45 from 91 in August. This is all a precursor to the Friday jobs report. Note that the jobs number was revised down to 60K. It was up at 74K, but they pared that back as the week progressed. Two days in and they are already cutting it back.

That is ahead, but the big story is what will happen after this reversal. It was a good reversal on volume, and they closed the indices positive. It was not a good reversal in that it was a double move. It took a late rally to get it to the upside rather than an unabashed surge right back up. That is concerning. It took what was perceived as a good story out of Europe which was not that big of a deal to get the market to experience more short covering that pushed the market up to close on the session highs.

NASDAQ looks strong, nice reversal. The small caps look pretty strong, and even the Dow looks strong. The SP500 is a question mark. It is right at that resistance, and it could easily flip right back down. Will it? Or will it follow through to the upside? If NASDAQ has its way, it will lead. This is the time of year that NASDAQ likes to lead. October is a month where the stock market tries to bottom, but this was not a bell-ringing, heralded bottom. Maybe that will be enough. Maybe there will be enough doubt in it that it will be able to continue to the upside.

Will it be a game-changer? I do not think so, because the economy is not in any position to move. There is no reason the economy is going to improve. Maybe it just has a momentary bounce as it did somewhat in the spring. After the ISM numbers went down, they started to rise, but then they turned back over. It cannot go down in a straight line forever, and we have seen some improvement in the economic numbers of late. Maybe that is enough to bounce the market higher. Again, I do not think it is a game changer. I think the stock market will come back up to the top of the range, or maybe a bit higher, and then roll back down.

The thing is, there has to be some reason for the market to turn. We have the same tired economic ideas out there right now plus the fact that nothing can possibly be done until after January 2013. That does not boat well for the economy overall. That is why we are getting a lot of changes in outlook where the analysts are downgrading the economy and growth. That is not thrilling, but it is something we can make money off of. We can still use this reversal to make money playing some positions higher. We jumped into some QQQ positions on the reversal. Caught that just where we like to catch them. We could still play some upside on the DIA. Maybe we can get a bit off that as well.

We will also take a look at some kind of position on SP500 to the downside. Why? Remember, it got up to these lows and has not convincingly moved through them yet. We may be able to get a downside play there. There are many quality reversals/engulfing patterns that we saw at the end of the session. LTD has a really nice engulfing pattern. ORLY has a nice engulfing pattern. ROK has an engulfing pattern. SIMO, an engulfing pattern. TJX does not quite have an engulfing pattern, but it is close. There are many strong stocks that have reversed and are ready to move to the upside. They can pull the market higher.

This is good timing because earnings are coming up. Lots and lots of earnings. We are getting hints that earnings will not be as good as they have been. We have had many quarters of growth, but we are getting indications from some very important companies, such as FDX, that things are not working that well. It was having trouble. It had a reversal on Tuesday, but it came out and said it was not doing that well. Last week WERN in trucking said its customers were not ordering as much. That is a problem with the entire freight industry right now.

There are issues out there. We could be disappointed, but the market is in perfect position to bounce early in October ahead of those results. We can play that bounce. We may not get the earnings we want, and the market may be disappointed and may send the market right back down. But we should be able to get a nice bounce out of this into those earnings and in anticipation. We have had this big selloff. The market is in position to bounce if earnings are decent, and investors may want to move into stocks to take advantage of that. We can play the upside, but we have to be ready. Why? For the one “in your ear” as they said in Field of Dreams. When everyone is expecting earnings to be good and the market to bounce into them, that is when things can blindside you.

That is just a caveat. We are looking to play upside, but we are looking at just a bounce. I am not even convinced it will be a great bounce because of that double move in the market. It required that late move to bring it back to positive. We will look to play the upside, but we are just playing it as a bounce in the range. I do not think this is any kind of bottom that will lead to a great run higher. There is no reason to think that. If it comes, we will gladly take it. For now, we took a lot of gain on the downside as stocks sold off. That was our plan. We banked a lot of really sweet gain. Now we will see how those rebound and whether they stall at resistance. We will also watch the indices to see if they stall at resistance. We will let our upside positions move and see if they stall at resistance. If so, we use the bounce to close them out, and then we flip to the downside again. Again, we reload to these plays that just made us a bunch of money and take advantage to the downside.

For upside we want to play some indices like the DIA. We will see if that can give us something to the upside. There are some big names that can move well and make us some money short term. We are not looking for any long-term relationships. If it turns out to be that way, that is fine. Often those are the best ones when you are not looking you find what you were really looking for We will just let it show us if that will be the case. We will not anticipate it, and then we will not be disappointed if it does not show up. We will just look to take what the market gives. Right now I think it will give us a bounce.

I want to add the caution that we have this less-than-convincing move on SP500 with the double move intraday and the fact that it is just now cracking into its trading range. Everything looks good. Sentiment indicators vastly-over sold, vastly extreme to the negative side. It should bounce, and it started to bounce, but that does not mean it hits a new high on this move. It means we may just get a bear-market bounce. Let’s face it, we are in a bear market.

There was much hullabaloo today about how SP500 traded in bear-market territory for a brief period of time. With this kind of selloff and the kind of economy we have, we have recession in a bear market. We just need to get our minds around this and continue to take what the market gives. We will look to use the market as a tool to make money. It is nothing personal and nothing to get angry over. It is not out to get us; it is just a market. We have to understand that and take good risk/reward plays and execute. We will continue to make money as we have been.