Friday's session was a punitive one in the shortest of time frames, as traders looking for some sort of short term oversold bounce were treated to one… that lasted three hours. In the 30 minutes framing President Obama's speech the S&P 500 fell some 12 points, taking away almost all the morning gains. While there was some pickup later in the day it was not energetic, and didn't do much to offset the damage of the early afternoon. So we remain in a similar state as late last week – quite oversold, near some key supports, with a market prone for a potential oversold bounce. Of course duration and magnitude and delivery date will be the interesting variables. Worst case scenario for bulls is a 10-20 point S&P bounce that is relatively meager in size and length of time – but that would be the textbook move after leg one of a selloff. Of course very little has been textbook with the advent of the intervention era.
The S&P 500 essentially completed its 50% retracement of the entire move from the June lows to September highs Friday morning. Much like the NASDAQ did the previous week, the index is hovering around its key 200 day moving average on the first touches – the question is does it revolve similar to how the NASDAQ did with a new leg lower after spending some time near here?
The NASDAQ has been the leader down the past two months, with 5 consecutive down weeks and 7 in the last 8. Obviously the most oversold index (already at its 61.8% retrace), with technology being one of the most oversold sectors. Apple of course has been a major culprit… it too bounced Friday but gave back much of that in the afternoon selling.
It seems both bulls and bears are looking for a bounce (bulls to say "that was the bottom!" and bears to find better entry points for shorts), so one wonders if it's too obvious of a move here. Whatever the case the market structure is currently in a damaged state with time needed for healing even if you are of the belief that is as low as we go. Bounces in this environment can be vicious but are usually short lived, and to participate to a large degree requires absorbing a lot of damage to the downside. More the time horizon for daytraders.
Economic news is going to be tricky here for the next few months due to Sandy. It will also be interesting to see the impact of fourth quarter earnings in January as surely some companies will be affected and others will use it as an excuse for poor results. With that in mind retail sales will be released Wednesday with an expectation of a 0.2% drop. Weekly unemployment claims should see quite a spike due to Sandy and the NY and Philly Fed #s (to be released Thursday) probably will be useless.
Bernanke has a speech Thursday morning but it's housing related so no fireworks there – instead look for traders to clutch at the FOMC minutes Wednesday afternoon for hints for EVER more easing programs – this time something to replace Operation Twist as it runs off at the end of 2012. Even though we can now clearly see markets can sell off during QE (a risk I highlighted aka the emperor has no clothes effect) the Pavlov dogs still will feed hungrily on any of the same language that indicates QEinfinity expansion. Also don't forget Europe which only seems to matter when the financial press decides to focus on it.
Any securities mentioned on this page are not held by the author in his personal portfolio.