After selling Wednesday, stocks are on the comeback trail, thanks to a lot of liquidity.

There may have been some worry that the bids were leaving the market, but on Thursday it was apparent they are still there. Stocks opened weak but roared to the upside and posted solid 1% or better gains on the major indices. It was not all straight to the upside, however. The futures were lower early in the morning, and this was on the heels of the Wednesday high-to-low action that saw a reversal from early gains into some pretty steep selling. Even though it was pretty steep (that is a technical market term), it was not horrid. The SP500 was still holding the 10 day EMA. Indeed, last Friday when the market sold and showed some bids being pulled and some sellers actually stepping in, the SP500 held the 10 day EMA. Every time it has sold over the last week, the indices have basically held near support. That is hardly buyers vacating the building.

Nonetheless they are not as robust as you might believe. Wednesday was an ugly session, and we saw some big reversals. Of course AAPL was the stock that was on everyone’s lips on Thursday as it was on Wednesday, Tuesday, Monday, the week before you get the idea. We had that reversal and then a further selloff that held the 10 day EMA. Then it reversed in the afternoon and helped the swoosh to the upside in the overall stock market. Interestingly, it did take some better U.S. economic to help to turn those futures from negative. There were some better Jobless Claims and Housing Starts, and the Philly Fed was good. That started to swing the momentum to the upside, and it continued as the day developed.

The big push came when the ECB, following in the footsteps of the U.S. on liquidity, said it would swap good, high-quality bonds for the terrible, crappy Greece bonds. When you are swapping out good for bad and putting those into the ECB’s books, that allows Greece to be a player yet again and finances can flow among the EU nations. The implication is, if the ECB will do that for Greece, it will also do that for the other countries that may need it. Maybe the ECB has a little cover here because we know that Portuguese and Italian bond prices have dropped (in yield terms). That is making money much more readily available and helping the finances. Perhaps the ECB sees this improvement giving it the cover to take out a known bad actor such as Greece.

Liquidity does amazing things. It has done incredible things in the U.S. We could not get out of our own way after this bear market and recession hit. We had a massive stimulus package that directed where hundreds of billions of dollars would be spent. In many cases we threw it down the hole on companies such as Solyndra and other government-directed investments. They did not return a thing and, indeed, lost our money. The problem is that government-directed money does not flow where it needs to go and where the market wants it to go. It does not go where the new ideas are. Thus we have a stagnation of new ideas and capital goes to dinosaur companies such as GM and Chrysler that probably should have failed anyway. Otherwise we might have better, stronger, more inventive companies in their place right now. But that did not happen, so our economy stagnated for three years.

Then what did we have left after the stimulus money was long gone and any impact, negative or positive, had dissipated? There are way too many regulations, but we did not have as much meddling, at least in directing where the money should go. With the trillions of dollars the Fed has injected into the system, the economy started to float up. That money eventually goes to work. We will eventually have inflation out of it, but that is the whole theory behind massive liquidity. You put so much liquidity into the system that the economy rises. That is what we are seeing, but it only rises so much. If you have a lot of regulations, massive debts, and bad economic policy, liquidity can only so far. Thus we have our tepid GDP growth at 2.8% in Q4, and yet that was seen as some kind of incredible blessing from heaven. That is pathetic growth for the U.S. It may be great for Europe, but we are not Europe. And we still have too much unemployment although it is artificially low from the government numbers. Even Ben Bernanke said to get used to 5.2% to 6% unemployment as our new normal.

That just goes to show you that monetary policy can only go so far in ginning up the economy and recovering from the damage that was done beforehand, as well as after the recession started with the errant policies of the government. It tries to give away money to everybody and direct it to special programs that it likes and friends of the administration versus letting the money figure out where it needs to go. It could be going to the new ideas that give us companies like AAPL, CSCO, MSFT, GOOG, SBUX, you name it. Then we create millions upon millions of quality jobs and then billions upon billions of tax revenue dollars.

Has anybody looked at tax revenue lately? Withholding taxes are down. How can that be if all these people are getting jobs now and the unemployment rate is dropping? Makes you think. Actually, it makes you draw logical conclusions that unemployment is not really getting any better and the economy is not that good. But you do not need me to tell you that.

I digress a bit, but the point is that liquidity is a many-splendored thing. You can see what it did to the market on Thursday. It turned a sloppy market at the open that was trying to pick up some speed, move positive, and post some gains into a barn burner into the close. A barn burner, indeed.

SP500, +1.1%; NASDAQ, +1.5%; Dow, +0.96%; SP600, +1.96%; SOX, +2.44%

Very solid numbers. As I said, liquidity is a many-splendored thing.

FRIDAY

Friday there is more economic data. It is in the terms of the CPI and whether it will be hot or cold. Supposedly the PPI will not cross over. It should not, given the price of commodities and crude goods. Leading indicators are out at 10:00 o’clock. They are not that useful in terms of how well it leads. It can be so wrong or it can follow along. I do not give too much credence to it.

Let us get back to the action itself. I am looking at AAPL. After the reversal it held the 10 day EMA and bounced. Maybe it will provide the bailout mechanism, so to speak, for the market overall. But the market is not in bad shape. Do not get me wrong, I do not want to say that NASDAQ breaking to a new post-bear market high is a negative. There are just a few factors that are worrisome. Those being the downside days where they get popped to the downside with some sharp selling. Then, as I noted on the following day, we get those market “sell on close” orders that you can see in the SPY chart with these big reaches lower, and then in the individual charts where there are massive declines. There are massive declines where there is heavy selling pressure from big institutions. This is after hours trade that I am looking at on the SPY, but the volume is still quite high. These are big funds unloading positions, using the cover of the upside on a market that was closing out at session highs to bail out of their positions.

We do know that some big funds are selling on the upside. Maybe not selling out, but just taking some profits. We do know that insiders are selling quite a lot in February a lot more than usual. And as noted before, there are more downside setups in the mix showing up. That is just one of the factors that you see when the market weakens a bit. Some stocks that were stronger are not as strong anymore. That is another indication that maybe things are slowing.

Then we have that hole I talked about in the leadership where there are just not that many stocks in the position that, say, ARAY was in Q4. It was making its bottom, making its turn, and providing the big whooshes to the upside and the stock has basically doubled during that time. Those are not as prevalent. It appears we will not see as many of those at least right now without some more consolidation. That does not mean there are not plenty of stocks that are more like ARAY is right now. It has moved to the upside. It has made some great moves. It is putting in a little lateral test and looks ready to break back higher. Those are out there. OFIX is the same type of pattern. It has rallied up, it put in a consolidation, and it started to break to the upside on Thursday.

We definitely see that those can carry the market higher. There is no question about that. The market can run on those for quite some time. But just as there is a demographic gap in Japan that they lost in WW2. Where we had a baby boom they had a baby dearth because so many of their young men and boys were killed in the war. They have that lost demographic. The analogy is that the market does not have any stocks that are forming those big, broad bottoms right now. After the stocks that are leading this move are used up and need to be recycled and rest, what will take their place and drive the market further?

There are some issues that face the market, but right now they are not insurmountable. Recall what I was talking about on Wednesday. Even if there was a pullback, we are talking about a pullback to the October highs or in that general area versus a crash. That is a significant test, but it is a healthy test. On Thursday people were not talking about that test anymore. It was all over the place on Wednesday. I am still saying that the test could come. It could be one that we have to deal with. The action today does not change that. Lighter volume and all the other factors I just went through show you that we still have to be concerned about it. And we are. We have great stops on our positions. Very well-thought-out, perfect stops I might say. I will just toot our horn here. We have some good guys working on these, using parabolic SARS and other methods that we utilize.

We can let our positions run higher, keeping safe, good stops that will preserve gain. If things get out of hand, we can always move in and sell ahead of time. We also have great plays to the upside that we are still taking advantage of. We entered more today that look super. We will go ahead and play it if the stock market is showing buys. At the same time, we are seeing more downside. We will play attention to those and be ready in case the market does run out of gas and wants to come back in.

We will protect our gains, and we will play what the market gives us. For now that is a little upside. But we will be ready to take downside and get out of the upside if necessary. That is really no change in the game plan. We expected a rally up to these highs and we got it. The market is now trying to break higher. That will give us some lagniappe, and I do not mind that at all. But we also know it has not made breakaway velocity yet. It has not done the deal. If it does not make it, it could easily come back and we could have that test when no one is looking. The old “watch for in your ear” admonition from Shoeless Joe Jackson to Moonlight Graham in Field of Dreams.