The Game Has Changed

 | Jun 25, 2013 | 4:21 PM EDT
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After four ugly days of action, the S&P 500 finally managed an oversold bounce. It was on very low volume and didn't come close to recouping any key technical levels, but it brought a sigh of relief and helped to stem some of the fear that has been building.

The bears are smirking, thinking this is a classic "suck-in" bounce that will trap bulls into thinking they will get another V-shaped bounce. The V-shaped bounce has saved the bulls more times than I can count, but there is one very big difference this time: The Fed isn't supplying endless liquidity in the same manner.

When interest rates were zero, there were few obstacles to these straight-up bounces, but with the ProShares UltraShort 20+ Year Treasury Fund (TBT) going parabolic recently, the game has changed. I'm a bit surprised that the market didn't sink more in the closing minutes as the TBT closed at the highs of the day.

If the Fed does something to bring interest rates back down, this bounce can continue, but I have doubts it can be done very easily. This does not look like a bounce that can be trusted for long, but I'll give the bulls a bit more room to run. They have hard work to do to save this market, and I'm not optimistic they can do it again.

Have a good evening. I'll see you tomorrow.

June 25, 2013 | 1:36 PM EDT

Buyers Are Nibbling

  • Bond yields continue to be a driving force.

A routine little bounce is kicking in. It started slowly as sellers were looking for exits on the initial gap up, but it has found support and buyers are nibbling.

The two-year Treasuries auction was a bit weak, which is taking the market off its highs. That is good illustration of how the driving force continues to be bond yields. If the ProShares UltraShort 20+ Year Treasury Fund (TBT) continues to run higher, it is going to be a major problem. If the Fed can jawbone support for bonds, this market can put together a recovery but there are still tremendous worries about rates, and the issues in China only make it worse.

The real question is whether we should be looking for a V-shaped bounce. Every time I start thinking it can't happen again, it does. But the big difference this time is that the Fed isn't backing it up in the same manner. Even dovish comments are met with skepticism, and that is a major change.

I'm itching to put money to work but see little. One thing on my radar for later is YRC Worldwide (YRCW) but if this market closes weak, it is going to cause disappoint and send folks back to the sidelines.

June 25, 2013 | 10:47 AM EDT

Waiting for a Sign

  • Fear of higher rates is keeping the market contained.

Good economic reports are doing battle with higher bond yields and, so far, fear of higher interest rates is keeping things contained. Breadth is still strong with about 3,150 gainers to 1,950 decliners, but the early strength isn't being chased. In fact, it's quickly heading for the flat line.

It is an interesting change in market character compared to previous oversold bounces this year where the market would gap up and keep running. It goes to show how important interest rates are to this market. Until there is confidence that the Fed is going to exert pressure to keep rates low, it is going to be a major headwind for equities.

I'm itching to put cash to work but I am unimpressed with the action this morning. Almost everything I look at is off the early highs and not giving me confidence that recent lows are going to hold.

The longer it can stay in positive territory, the more likely buyers will inch in. But right now, they are standing aside and waiting for signs that someone else is willing to put money to work. I'm going to work on my shopping list and stay vigilant. Eventually, the opportunities will start popping. We just need to make sure we are ready.

June 25, 2013 | 8:19 AM EDT

All About the Bonds

  • The spike in rates can't be ignored.

Small movements in interest rates have a magnified effect ... a small movement can tip the boat. --Bill Gross

The market action is calmer this morning as the People's Bank of China made reassuring comments about interest rates and markets contemplate the overall support of the central banks.

The biggest positive the market has going is that central banks really don't want to lose control of interest rates. The big spike in bond yields will cause central bankers to come up with ways to reassure the market that they are still in control and we are a long way from the end of quantitative easing.

What has spooked the market recently is worry that the economy really isn't improving much but the Fed is already moving to curtail some of its bond buying. There are no signs of inflation, so there doesn't seem to be any compelling reason for the Fed to put the brakes on. Coupled with the interest rate issues in China and we have all the ingredients for a decent correction.

Has the correction run its course? Have we seen the lows and are now turning back up?

A month ago, I would be very optimistic about another V-shaped move and straight-up action after a pullback, but something major has changed in the last few weeks. What has changed is that the Fed isn't driving the market like it was.  Even though the Fed continues to say it will be highly accommodative, the market isn't buying it like it once was.  The market is anticipating less Fed support and that is reflected by the huge spike in interest rates.

The key to market is going to be bond rates. If they start to come back in and the market regains confidence that the Fed is going to keep the liquidity pump going, equities will rally. But bonds aren't listening to the Fed, and that is the big issue.

Technically, we have suffered significant damage. The market has breached 50-day moving average support for the first time this year and seen strong downside momentum.  It was stretched enough to the downside yesterday morning to produce a good-sized snapback, but still closed poorly and had very poor breadth with more than four stocks down for each that was up.

We have another oversold bounce attempt this morning and analysts are starting to recommend a number of beaten down names, but the dip-buyers have been burned lately and don't have the same confidence they did a few months ago.

Many market players are anxious to bet on a bounce, but my view is that the market has to prove itself.  We need to see stocks hold and new support levels develop.  We are at a juncture where many buyers are anxious to declare that we have made a good low, but that will make a failed bounce even more painful and dangerous.  Manage things closely and don't get caught of a bounce attempt fizzles. Watch closely for new intraday lows, that is where the traders will set their sell stops.  If we can hold lows, the buyers will continue to inch in, but it is the lower low that keeps the pressure on.

We'll see how the market handles this opening bounce. The mood is better and dip-buyers would like to be active, but the spike in interest rates is not news that can be easily disregarded.

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