Strong Action Makes You Wonder

 | Jul 05, 2013 | 4:13 PM EDT
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Two weeks ago when Ben Bernanke commented on tapering off of bond purchases, interest rates spiked and the market sold off sharply. This morning, when news of better-than-expected jobs growth hit interest rates spiked up again, but this time the market quickly recovered after some early selling pressure.

Trading was extremely thin today, so it is tough to draw any major conclusions. But the strong action has to make you wonder if maybe the market is starting to accept the fact that rates are going to start inching up as the economy improves. Many folks question the assertion that there is any real economic improvement and there are plenty of people finding flaws in the employment news, but there are positives out there. The dovishness from the ECB and the BOE are helping as well.

I have to admit I'm a bit surprised that the market was not concerned about the spike in bond rates today. Perhaps market players are expecting the Fed to talk rates back down again like they did over the past week, but I find it difficult to believe we can keep running up so easily as the TLT is hitting the lowest levels in nearly two years.

In addition to the interest-rate issue we have the start of earnings season, which will add some color to the debate over the pace of economic growth.  Expectations for earnings don't seem particularly high, which will favor the bulls, but if interest rates continue to move higher it is going to be a major headwind.

The recent market action left a lot of folks on the sidelines with idle cash. If the market continues to hold up, they are going to be forced to start buying as performance anxiety builds, but I'm not at all sure we can ignore interest rates.

Have a great weekend. I'll see you on Monday.

July 5, 2013 | 10:32 AM EDT

This Bond Action Will Be Tough to Shrug Off

  • I'd prefer protecting gains at this point.

The big question this morning is whether the market can run higher, even as iShares Barclays 20+ Year Treasury Bond (TLT) takes out the June lows and as gold gets crushed again. It was bonds that caused the ugly collapse last month, and you have to wonder how this market can run higher if interest rates are hitting highs. The bulls will say that a strong economy can handle higher rates, but we have seen how much folks fear stimulus tapering by the Fed.

As I mentioned in Columnist Conversation, I'm selling down positions into strength, and I even took a little ProShares UltraShort Russell 2000 (TWM) as a hedge. I haven't had any index shorts for a while, and I'm moving slowly and leaving plenty of room to add some more.

Solar-energy stocks continue to act well, and I took some JinkoSolar (JKS), which I have as a Shark Technical Buy this morning. Plenty of stocks are still in good shape technically, but I don't think the market can shrug off the interest-rate issue for long. I'd rather protect gains at this point than to push too hard for more upside.

July 05, 2013 | 9:02 AM EDT

Jerked Around by Central Bankers

  • Their jawboning, and thin trade, should complicate matters today.

Always be nice to bankers. Always be nice to pension fund managers. Always be nice to the media. In that order. -- John Gotti  

They're back. The central bankers are at it again, promising an endless supply of cheap money -- and, at the outset of premarket trading, that's what caused the market to leap higher. Trading is extremely thin due to the Fourth of July holiday, and that probably accentuated the initial move, since so many are not in position for a big spike. But this is basically a replay of what has happened quite often before.

It is always central-bank actions that drive these V-shaped moves. The market goes straight up, and then the central bankers will make dovish comments and keep equities going even further. The comments usually come as the market hits logical resistance levels, and just as many market participants start to anticipate that the bounce may start to lose steam. The skeptics are squeezed or forced to chase long exposure, and that just keeps the upward movement going.

In Europe the big jump was mostly a "bad economic news is good news" situation: Both the European Central Bank and the Bank of England basically saying things are bad enough to keep interest rates low for a very long time. Yet futures kicked higher still after the strong U.S. jobs report.

But, overall, we've been able to sum up market success over the last few years in one very simple and trite aphorism: Don't fight the Fed. If you have simply adhered to that idea, you have done well. The bears who keep trying to anticipate when the central bankers' influence will wane have lost buckets of money.

Another thing I have learned about this market is that you simply cannot short bounces after a technical breakdown. It may seem logical, and it used to work, but these days it's a losing strategy trying to anticipate when the market will roll over again.

June employment gains trumped expectations this morning, but that has only lifted market futures further -- even despite recent fear that good news would spur the Fed to taper quantitative easing earlier than expected. Fed members have been calming down the market for the last two weeks, telling us not to worry about that stuff, so perhaps that message has taken.

The U.S. Treasury bond market had firmed up, but it was recently indicated lower this morning, which is problematic. If bonds are under pressure, upside in equities is more likely to stay contained -- so keep a close eye on the TLT. If that ETF doesn't start to act better, this gap-up equities open may not hold very well.

Also keep in mind, again, that all of this is happening on what is likely to be one of the thinnest trading days of the year. That is going to complicate matters further. No one really wants to be here today, and the fact that we are being jerked around by central-banker jawboning just makes it more difficult.

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