As stated late Friday all the necessary components for a short term bounce were triggering except for a high over the previous day's high… but it was close enough for government work. A point here or there in the closing 5 minutes would have done the trick. It is funny how the news often fits the market, and what I mean by that is that comments out of government Friday morning set stocks off just at the point they needed to, at the 61.8% Fibonacci retracement on the S&P 500.
It was actually a bit trickier than that as that level was reached around 10 AM, the market had its cursory knee jerk bounce off and then looked to be poised to roll over yet again in the 11 AM hour, undercutting the early morning lows (and 61.8% retracement)… which would have been a very bearish development…. right before the news conference in D.C. set stocks aloft.
This morning we are following that reversal with a big move in the premarket which is no surprise – looking back at 2012 the lion's share of the gains have come in the overnight market due to headlines (mostly out of Europe this year). The sharpest rallies come within the context of selloffs, so this move should be fast and furious. Which is of course why people are constantly trying to catch the falling knife during the downtrends. Of course the bigger issue is what is left after these oversold conditions are worked off.
Earlier this year during the April/May correction the move down was roughly the same amount of time but sharper in descent on the S&P 500. (the NASDAQ has been about as bad this time around) That correction transitioned into a very herky jerky June and July which were very difficult to prosper in as there were massive headline moving events. If you remember there was a period back then where something like 7 out of 21 sessions were up (a 1:2 ratio of up to down days), but those 7 sessions were so strong (coming on gap ups mostly) that the market was up during that period of time. That was definitely an atypical way to begin a leg of a rally.
If one believes "that" was the bottom (Friday) then there still needs to be a lot of evidence created by the markets in the coming weeks. Almost every sector has been blown to pieces and most individual stocks of the "growthy" type are very damaged technically. If one believes this is simply an oversold bounce, there should be some nice shorting opportunities coming in the week(s) ahead as this bounce runs its course.
As for the news, of course this fiscal cliff is the only thing people are talking about but I find it hard to see anything other than the typical kick the can down the road in the lame duck with some sort of tiny "down payment" to debt reduction that will mostly be accounting tricks, and then some promise of real progress "next year". Par for the course with the politicos. Hopefully something substantive and long lasting actually does develop in 2013 because the D.C. crowd is really causing headaches for the rest of the country.
While last year was a major exemption (worst Turkey week in many moons), generally this week has a positive bias to it as volume is light and some professionals take off early. With the mood over the fiscal cliff "brighter" (for now) it seems this year might be more typical than last. As for economic data not much out there outside of some housing data today and Tuesday. Flash PMIs for China and Europe released overnight Wednesday (note Chinese markets at 3 year lows!) Markets will be closed Thursday and close early Friday.
Any securities mentioned on this page are not held by the author in his personal portfolio.