Doing Its Own Thing

 | Jun 06, 2013 | 4:13 PM EDT
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Midday panic due to a spike in the yen provided a classic washout and reversal at the 50-day simple moving average, which propelled the market to a strong close. It wasn't a very lively bounce, but breadth was strong all day and the mood shifted to positive after the yen drama. This is the sort of oversold bounce you would expect, but the issue is whether the market can keep running back up.

It probably would have bounced even more today if we didn't have the very important monthly jobs news tomorrow morning. There's been all sorts of speculation about how the market will react to these numbers. I'm not sure if bad news is good news or good news is good news or whatever, but it is very likely that the news will be used as an excuse for the market to do whatever it wants to do.

I suspect the market wants to go up, and I'll be looking for the jobs news to be spun in such a way that it is a market positive. Whether or not we end up with yet another V-shaped bounce will be a question for next week. Right now, we are working on a routine oversold bounce that is playing out pretty much the way it should.

The bulls want to believe that this is just another shallow pullback that will be forgotten quickly, like the others we have had since November, but I'm not so sure. The test will be to see how the current bounce plays out. The jobs news in the morning will provide the necessary excuses.

Have a good evening. I'll see you in the morning.

June 06, 2013 | 1:50 PM EDT

A Double Dose of Pain

  • The carry trade is pressuring the market.

Two weeks ago, new intraday lows like those we are seeing today were unheard of. The main catalyst for the dip to new lows was a big move in the yen, which is now reversing a bit but remains the main focus of the market. The reason the yen is having so much impact is that many folks who put on a "carry trade" are now suffering a double dose of pain.

The idea behind the carry trade is that you borrow funds in terms of a declining currency like the yen and then invest that money in an uptrending market like the U.S. You not only make money on your equity position but you benefit by repaying the loan with appreciated dollars. That is the theory, but it's working the wrong way right now and that is putting pressure on both the yen and the market.

The bounce buyers are hoping that the big move on the yen was the washout that is finally going to get this market moving a bit to the upside. It really is amazing how different it is acting now compared to what happened during the uptrend.

What is adding to the uncertainty today is that there really isn't much clarity about whether or not the market wants good or bad jobs numbers tomorrow. Some think that a poor report gets more QE from the Fed, but others say the Fed is going to start tapering unless the numbers are an absolute disaster.

I'm not sure there is going to be that clear of a cause-and-effect relationship tomorrow. I expect choppiness to continue although there is going to be a lot of pressure to produce some sort of oversold bounce. It is a very tricky market and you have to keep things small and tight until there is better clarity.

June 06, 2013 | 11:07 AM EDT

The Evidence Mounts

  • The market action is changing.

I've been babbling about a change in the character of the market action for a week or so and we have further evidence of it again today. The market was all set up for an oversold bounce off resistance and even had benign news out of Europe that could have been used as an excuse to buy. Unlike what happened so often during the uptrend, a half-hearted attempt to the upside has quickly faded. The indices haven't taken out the early lows yet, but there is no urgency among dip buyers.

One thing I find very interesting is how so many bears who ignored the charts on the way up are now technicians focused on key levels. These fair-weather chartists only look at the charts when they confirm a view of the market that they already have. They come up with all sorts of fundamental arguments against the market when the charts are strong and trending up, but then when it turns down, the charts they dismissed as meaningless hold great predictive value.

My view has always been that the best approach is to let the price action be your guide. Stick with it when it's strong and back off when it weakens. It has definitely shifted downward recently, and that means holding high levels of cash while developing watch lists and getting ready to start inching into favorites. The goal isn't to buy the market low but to buy it when it has the best chances of sustained upside.

This action is very poor this morning and it may stay that way due to a hesitance to get in front of tomorrow's very important jobs news. I'm doing very little, but I did add to a position in bio-diesel play Renewable Energy Group (REGI). My watch list is developing, but there is no hurry to accumulate.

June 06, 2013 | 7:41 AM EDT

Looking for This Bounce to Fail

  • I'm not ready to say that the correction is over.

Perhaps we can recognize our way out of patterns rather than repeating our way out of them. --Patti Digh

After two days of steady selling we have a routine oversold bounce kicking in this morning. The S&P 500 has some support near here, at its 50-day simple moving average, and the bounce buyers are hungry to give it a go.

The bigger and more important issue is whether we can bounce back like we did in February and April after similar selloffs. Both times it looked like the market was ready to crack, but we found support and went straight back up. In February, the selloff was followed by a streak of 11 positive days out of 13 and in April the dip lead to a run of 18 positive days out of the next 23.

It is those sort of V-shaped recoveries that have kept the bulls confident even when the overall technical picture starts to look shaky. Betting on downside momentum simply hasn't worked very well for quite a while.

So, is it different this time or are we poised to come charging back to recent highs like we have done so often?

The main thing that is different right now is that the market is losing confidence that the Fed is going to continue to be as aggressive with its bond buying. There are some general economic concerns and worries about Japan and China, but nothing is as important as the Fed and its dedication to keeping interest rates low. Fear of what will happen when the Fed starts to taper off its bond buying is why the market is struggling.

The dilemma that this market poses is that the standard technical analysis tells us we shouldn't be too trusting of an oversold bounce at this juncture. The theory is that after the breakdown we've had there would be stuck bulls and more aggressive bears that will be looking to sell into strength and they will put pressure on a bounce and cause it to fail.

That certainly is logical, but in this market the tendency has been to bounce after a pullback and then go straight back up in very streaky fashion. Bears get squeezed and underinvested bulls are constantly struggling to put cash to work.

Every time I start to think that this time the market will act more normally and not pull off another V-shaped bounce, I am proven wrong. I would definitely be surprised to see the market go straight back up once again, but I have seen it so often that I can appreciate that possibility. The dynamics of the market have changed and the nature of liquidity seems to support that action more often than not.

At this point, I'm not ready to say that the correction is over. I will be looking for this oversold bounce to fail. Part of the reason for that is because so many seem convinced that the market can't possibly correct very much. There doesn't seem to be any real concern that a significant top may be forming. In fact, the fear is that the will miss out on the oversold bounce rather than be caught in more downside.

The bulls have been right all year, so it makes sense that they are confident, but at some point that attitude will produce poor positioning and cause a correction to gain momentum.

Keep in mind that we have a very important jobs report tomorrow and with the Fed wavering, bad news may actually be good for the market.

We'll see how this oversold bounce acts this morning, but the market is likely going to start thinking about the jobs report very quickly.

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