Bulls Have a Tough Slog Ahead

 | Jun 21, 2013 | 4:05 PM EDT
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The market managed a decent oversold bounce intraday that had the bulls breathing a sigh of relief, but the big picture still doesn't look very pretty. 

The Federal Reserve has been the bulls' best friend for over four years, but this week some doubts have been raised about how much longer that will last. What was most interesting about the market's reaction to Fed chief Ben Bernanke was that he didn't really say anything very hawkish. He only stated that bond-buying is likely to slow, since the economy is showing some strength -- and the Fed stands ready to do whatever it can in case the economy slows.

Among many market players, the reactions to Ben's comments was, "What is he smoking?" There is widespread skepticism regarding the assertion that the economy is growing strongly enough for the Fed to start backing off. The real reason the market sold off this week is that folks are afraid the Fed is misreading the economy, and that it may taper off bond buying too early.

The bears had further ammunition in the biggest drop experienced by U.S. Treasury bonds in some time. Interest rates flew higher and seemed to reinforce the idea that the Fed is going to ease off and rates to start to rise.

There is going to be endless debate about whether the market is correctly reading the Fed, and whether it is doing the right thing. But the real issue of concern is whether the market is now ready to fall into a more prolonged downtrend.

We certainly saw a good start on some downside momentum this week, with the market selling off Ben Bernanke's comments late Wednesday. Stocks then gained steam on big volume Thursday, followed by a mediocre bounce Friday as options expired and spiked up volume. The major indices breached key support, particularly at the 50-day simple moving average, and there is plenty of room for further downside. The technical picture definitely suggests the market can fall further.

The bulls will have to work hard to overcome the poor charts. If they try to argue that the market is overacting to Bernanke's comments, they will still be faced with the bond action, which is clearly forecasting that interest rates are going high. Who are you going to believe? A mouthpiece at The Wall Street Journal or the trillions of dollars betting that bonds are going lower?

It is going to be a challenging environment, going forward, especially if things slow down during the summer. But we should have some interesting volatility, and there are definitely some opportunities developing within the chaos. We'll be able to make some money if we stay flexible.

Have a good weekend. I'll see you Monday.

June 21, 2013 | 10:40 AM EDT

Dip-Buyers Lose Confidence

  • They want someone else to step up before they put money to work.

The SPDR S&P 500 (SPY) and PowerShares QQQ (QQQ) are trading ex-dividend this morning, which is confusing some technical levels a little but, so far, there's a tepid bounce attempt. The dip-buyers have obviously lost confidence after the carnage yesterday and they want someone else to step up before they start putting money to work.

So far this year, the tendency after a pullback is for a bounce to start very slowly and gain steam the longer the market hangs in positive territory. Keep in mind that this is liquidity-driven action and, after yesterday, we can't count on liquidity to be the driver that it has been.

I flipped a couple of stocks I was trapped in into early strength and haven't done any notable buying so far. Probably the best-looking chart I see right now is Sarepta (SRPT).

Source: TCNet

If we see better overall action, I'll be looking to SRPT, but the indices are hitting new lows now and I have no interest in fishing.

At the time of publication, Rev Shark was long SRPT, although positions may change at any time.

June 21, 2013 | 7:48 AM EDT

The Game Has Changed

  • Don't be too fast to trust a bounce.

There is certain relief in change, even though it be from bad to worse! As I have often found in traveling in a stagecoach, that it is often a comfort to shift one's position, and be bruised in a new place. -- Washington Irving

After a terrible day like we had on Thursday, should we expect the market to find support and move steadily back up? Virtually every technician will answer that question with a resounding "no."

After the worst day of the year, when we sell off on big volume and terrible breadth and breach key technical levels, it is reasonable to look for some sort of oversold bounce. But action that bad is a sign that something has changed in the market. People are looking to escape and those that didn't yesterday will be inclined to use a bounce to lighten up their exposure.

Market players have had little fear of pullbacks in recent years because they could always count on a friendly Fed and its steady of supply of liquidity.  Whether or not we can count on the Fed to keep on buying bonds is the issue this time and adds some real risk to the idea of a quick recovery.

I've written about the market's tendency toward V-shaped moves extensively, ever since the market bottom in March 2009. These moves have been causes mainly by central bank liquidity and computerized trading. It isn't normal human behavior and has helped to create the feeling that the market is manipulated and artificial. The bulls don't much care as long as they are making money, but it has been a challenge for traders who have to dismiss news -- technical and fundamental -- as the only thing that has mattered is liquidity.

The big question now is whether the Fed's signal that bond buying might slow is going to change the way liquidity has been driving this market. In recent years we'd expect the market to recover very quickly from a pullback like we have had recently. Betting on downside momentum to build has been one of the worst trades you can make.

What makes this question particularly tricky is that the Fed really hasn't announced anything major yet. It made it clear that if we have weak economic news, the printing press will hum along, but what is problematic is that the bond market is reflecting a major change in policy. Long-term rates flew higher and many pundits don't feel they are finished yet. The bond market is telling us that something very different than what Ben Bernanke hinted at and it is very hard to ignore when trillions of dollars in gains suddenl evaporates.

Prior to quantitative easing and the flood of liquidity created by central bankers a day like yesterday was a signal of a major change in the character of the market. Momentum traders would move to the sidelines, technicians would trigger stops and the bottom fishers would start talking about all the great opportunities that were developing as the market moved in lower.

These pullbacks never lasted long when the focus was on central bank liquidity, but something changed this week when Ben Bernanke was unable to comfort the market and bond yields went wild. It is possible that we will find support and turn back up, but this action has the feel of the old days, especially since it is worries about liquidity that are at the heart of the problem.

My plan is to see how an oversold bounce acts at this point. I'm going to be very skeptical of another quick recovery, but I'm not going to rule it out until I see how we act. I'll look for some short-term trades and I will develop my watch list of potential buys. I am in no hurry to build longer-term positions, but there should be some opportunities in stocks that were hammered unfairly.

The Fed changed the game this week and now we have to see how that is reflected in the price action. Stay cautious and don't be too fast to trust a bounce.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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