An Unsurprising Recovery

 | Apr 05, 2013 | 4:44 PM EDT
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Weak employment news and an ugly gap down didn't look so bad by the time the market closed. It still finished in negative territory but traded straight up all day and well off the early lows. What was particularly impressive was NYSE breadth had moved to almost even after starting well over 5:1 negative.

It was a good recovery but we have seen this sort of thing so often the last few years that it isn't surprising. The Fed-created liquidity, underinvested bulls and Pavlovian dip-buying have made the bounces almost automatic on gap-down opens.

The problem is that today's jobs report really is bad news. We have had a number of weak economic reports lately and big-picture negatives are brewing. Traders have been happy to ignore any worries and have done a great job of perpetually squeezing the bears, but you have to wonder if they can keep it up much longer.

What is going to be particularly interesting is that earnings season is starting and there hasn't been much talk about signs of economic softening. If we start seeing downside guidance, it is going to be tough for the bulls to keep ignoring the problems out there.

Ultimately, the only thing that matters is the price action and you have to be impressed by how the market acted today. It may not seem justified, but that sort of thinking hasn't been making money.

Have a good weekend, and don't forget to check out my weekend column. I'll see you Monday.

April 05, 2013 | 2:54 PM EDT

Bears Bedeviled By Bounces

  • Today is no exception.

Weak jobs news on top of other weak economic news, pressure in Europe and a weakening technical picture gave the market good reason to sell off today, but it bounced back strongly and is well off the early lows.

I suspect this action is a reflection of traders doing what has worked well for a very long time: Buying downside gaps regardless of the news. This has been a great trading strategy so why not join the party? Since when have fundamentals or economic issues mattered anyway?

The market is chugging along steadily and hitting intraday highs as I write. There's still plenty of red and breadth is negative, but this sort of recovery has bedeviled the bears every time they start to think things may break their way.

Despite the bounce, I hear quite a bit of complaining from traders who aren't finding much to do. There may be some active day traders stalking this action but the longer-term position traders don't seem interested in buying. I can understand that and I don't have much new going myself.

If this action is really driven by day traders, we should see them hit the exits into the close. But this action is what has been causing performance anxiety for underinvested bulls and they may be willing to bet on Monday strength.

April 05, 2013 | 11:06 AM EDT

A Deteriorating Technical Pattern

  • Risk of downside momentum is building.

Other than the White House spokesman, there is near unanimous agreement that the monthly jobs report really stunk. Since no one can put a positive spin on it, the focus shifts to who is to blame, which doesn't help the market.

The good news is that the market has held the early lows and turned up a bit, which is giving the dip-buyers more confidence. They aren't rushing in, but breadth has improved slightly and most stocks are off their lows. The key is not to breach 153.77 of the SPDR S&P 500 (SPY), which was the early low.

Unfortunately, even if the early lows hold and bounce, there's still a deteriorating technical pattern. Some support levels are holding but this sort of action chips away at it and increases the risk that downside momentum will build. While we might want to trade bounces, I don't see any reason yet to start rebuilding positions.

The benefit of the doubt has shifted to the bears. Even if we do have dip-buyers, we have to worry more now about strength being sold. We can't expect the bounces to last as more bulls find themselves stuck after action like this morning's.

I'm positioned with a very high cash level and just dinking around with a few small trades as I wait for some of my favorites to set up and offer an entry point. A couple of small ones on my radar are Vical (VICL) and Apollo Global Management (APO), but I'm keeping very tight stops on everything.

April 05, 2013 | 7:57 AM EDT 

This Is a Good Litmus Test

  • Check the market reaction to jobs numbers with expectations low.

It's just a job. Grass grows, birds fly, waves pound the sand. I beat people up. -- Muhammad Ali

The market is quite nervous in front of the monthly jobs report. We have had a number of weak economic reports recently and that suggests that the expectations for 200,000 may be a bit high. With weak economic reports out of Europe and Japan determined to kill the yen, there just aren't a lot of reasons for the bulls to jump in right now.

While I have moved heavily to cash earlier this week as small-cap stocks fell apart, I have not been overly negative due to the tendency of this market to so quickly recover from these bouts of weakness. In a more typical market environment, I'd be inclined to watch for short entries when we have an anemic bounce like we did yesterday. 

I don't know how many times over the past few years the bears have been burned when they rush to press short positions after a day or two of weakness. We see to suddenly forget what took us down and are right back at highs before you know it.

The most notable exceptions to this tendency toward quick recoveries have been the meltdowns that have occurred each spring for the last three years.  The pattern has been a good move up in the first quarter and then a lousy spring and flat summer before we rally again in the fall and finish strong.

Some economist have even commented that the seasonal adjustments that they make have been off and are that is producing better-than-expected economic reports in the fall and winter and worse-than-expected reports in the spring and summer.

The reaction to the jobs news this morning is going to be a particularly good test of the market mood. Expectations are already quite low and the tendency of this market for the last four months is to quickly shrug off negatives especially when they are well anticipated. If we don't bounce back on inline numbers that will be yet another signal that the character of the market action is shifting.

Overall, the indices have barely corrected this week, but there have been more and more warning signs. The main thing that has concerned me is the softness in small-caps and more speculative stocks. When the bulls are suddenly more risk adverse it can spread quite quickly to the broader market.

Weakness in Europe, poor economic reports and aggressive currency manipulation in Japan are giving the bears ammunition and when you combine that with the seasonal tendencies caution is definitely in order.

We'll see what happens on the jobs news, but I'm going to be very suspect of any bounce at this point.

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I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
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