Wednesday, August 25, 2010

S&P 500 Bounces off mid June Lows - Expect Much Bipolar Action in the Next Week

This market is acting incredibly technical - a big help for those of us awed and confused by the liquidity fed rally of 2009 where TA became almost useless.  This morning the S&P 500 bounced smartly off the mid June lows which was the only real support between "here" and S&P 1010 aka the ultimate support.

So we have many nicely defined levels and the fast money crowd is going to flip in and out between those obvious numbers.

S&P 1010, 1040, 1057, 1070 are the key ones for now.  A break of 1040 should lead to a revisit of 1010 at which point I am going to want to be leaning much more heavily long for at least a trade.  If S&P 1010 is broken, things could get very dark but one must assume there will be at least an initial bounce the first few times we hit this level as those in the know, realize this is such an important level to hold.

Today we had more rotten economic news but the key is the market reaction.  Eventually we will begin to price in bad news in specific niches.  Many people who drank Kool Aid and performed on financial infotainment TeeVee still had hopes for housing 4-5 months ago as they do not do cost benefit analysis.  They see bounces in economic figures (benefits) but do not ask what the costs are (record affordability, government bribery to get people to buy homes, Fed manipulation of interest rates).  Now many of these people seem to have given up the ghost on housing.  Which is actually a net positive from an investment standpoint.  These same folk were chirping "V" shaped recovery not 120 days ago... so we still have a lot of work to break them in other parts of the economy ex-housing.

A big back breaker would be any serious slowdown in China.  Last month's PMI was poor, but it was actually bought aggressively (confusing me) as speculators went to the Larry Kudlow assessment of "Goldilocks China" (not too hot, not too cold).  But with the potential for outright contraction coming on Sunday night's reading, that could be a back breaker.  We'll see.

Aside from that we have weekly jobless claims tomorrow, a poor GDP revision (already expected by the market) Friday, Ben Bernanke speaking from Jackson Hole waving his magic wand, and next week some doozies: Chinese and US PMIs (not to mention the Europeans), and the monthly jobs report which has a real chance of outright contraction even with the government 'creating' 100K+ birth/death model jobs.  I expect volatility to be intense as the bipolar market reacts to each report as if either (a) butterflies and unicorns awaits or (b) end of days nears.  Hence it remains impossible to build any real intermediate term positions as almost anyone in the market nowadays is just a short term flipper not willing to risk holding due to all the uncertainty.   Things should be much more clear a week from Friday and with the potential for the one country which led the world's rebound reporting negative PMI along with a possible contraction in monthly US employment for the first time in a few quarters - we might be seeing what the market has been working on "discounting" since late April 2010.

All that said the S&P 500 has dropped 80 straight points since Bernanke offered us QE Lite, and as always bounces within a downtrend are among the most vicious - so any one of these economic data points could lead to one of our traditional premarket gap ups of 2%.

p.s. One of my favorite quotes from Mr. (I did not see it coming!) Bernanke came from his Jackson Hole speech in 2007.  Sadly it was one the things Bernanke actually was correct on... not that he listened to himself!  He has been doing the exact opposite for 3 years in a row.  Read it and laugh quietly to yourself.

In August 2007, as financial markets began to crumble under the weight of bad mortgage loans, Chairman Ben Bernanke told the Federal Reserve's annual gathering at Jackson Hole, Wyo., that it wasn't the central bank's responsibility — "nor would it be appropriate" — to protect lenders and investors from poor decisions.

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