Is it real or is it just a bounce? Only your crystal ball knows for sure
So where does the stock market go from here?
U.S. stocks are bouncing off the February 2010 low near 1040 on the Standard & Poor’s 500 Stock Index.
Good news for anyone with money in the stock market. But what does it mean?
Two possibilities
Possibility #1: We’re looking at a bounce that will turn into a modest rally. That will consign the sell off from the end of April highs to the test of the 1040 low earlier this week to ranks of corrections. The rally that began at the March 2009 lows needed a good 10% correction so that it can build a base for another upward leg. And that’s what we got—a painful but ultimately not terribly damaging 12% correction in the S&P 500 index. It’s safe to re-buy or to stay in stocks because the trend that was just interrupted by the correction still points upward
Possibility #2: This is simply an oversold bounce—stocks fell so far so fast that prices brought out bargain hunters. The bounce will fade not so far ahead and stocks will resume their sell off. The downturn that began in late April isn’t over and we’re looking at something more serious than a standard correction.
I tend toward Possibility #2, but I don’t know for sure. Stocks are climbing on modest amounts of news from Europe and China that I would call “Not as disastrously bad as you thought it might be” news rather than actual good news. It is better than it could be that China isn’t actively dumping euros, for example, but that doesn’t mean that China has resumed buying the currency. Most likely Beijing has simply decided to hold onto what it has but not to add more even as its foreign exchange reserves increase. It’s better than it could be that Spain’s central bank is finally moving to do something about troubled regional banks. But the plan won’t do enough to actually eliminate failing banks in the sector. And Germany still seems committed to ignoring a similar problem with its regional banks.
In other words, the twin euro debt and China growth worries that fueled the correction are still in place and look like they’ll be with us for months yet. In that case I find it hard to put much money behind the idea that somehow U.S. stocks will managed to resume a strong rally without the participation of the rest of the world. (For more on this idea, see my post http://jubakpicks.com/2010/05/26/and-the-best-lack-all-conviction-the-odds-are-against-u-s-stocks-holding-alone/ ) Although I still believe that the U.S. market is likely to outperform the rest of the world over the next few months. I just don’t know whether or not that outperformance will result in actual portfolio gains.
Just as I was determined not to sell in panic when the market looked worse, I wouldn’t get too giddy here either. I still think the best opportunities in 2010 will be in emerging market stocks—and they’ll present themselves later in 2010. For more on the timing of my selling and buying strategies see my post http://jubakpicks.com/2010/05/21/sell-sure-but-try-to-do-it-on-the-fundamentals-and-not-in-panic/ )
The first test of the ability of this bounce to turn into something more lasting comes at 1130 to 1140 on the S&P 500. There’s considerable resistance at that level made up of a 50% retracement of the selloff and the top of the Bollinger Bands price range. At 1130 to 1140 stocks aren’t cheap—in the short-term—anymore and investors will be buyers only if they think the future looks brighter than it did just a few days ago.
Any read of the stock market is, of course, complicated by the long Memorial Day weekend. It would be absolutely normal for traders who made a profit today to sell on Friday ahead of the weekend to reduce their risk while the U.S. stock market is close.
So don’t read too much into any selling tomorrow. The test comes next week after we’ve all had our holiday and returned to work.
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Jim:
Is your 30% cash position more or less than your ideal allocation for this market?
My crystal ball never did work right, so I threw it away and just take profits when I can get them.
Sold Intc and will buy it back if it drops below 21.
Also sold part of my Vz holdings and will buy it back at 27.
Jim,
I couldn’t agree more. If the market opens with an up day on Tuesday, expect more of the same near future. Of course, if there is some kind of bad news over the weekend…
it feels like a dead cat bounce, seems like the momentum is favoring the downside (hope I’m wrong)
Common reasoning seems to be following charts and not ‘crystal’ balls. As a contrarian, I therefore prefer the latter, and mine says ‘Possibility 1′. Either way, put on your seat belts folks, its a wild ride.
Ed:
I feel we are about to run out bad news except corp earnings uncertain going forward.
Unless Iran make some provocative move.
One strategy could be to take profits by selling half of positions that are at or close to target. Probably right on timing…a week or two to make those decisions…especially on up days like today.
Off topic:
In Jim’s other article, some people were praising china’s deft handing of policies and their so called attention to customer. I am curious if any one can comment
why all the rough countries (Nkorea, Pakistan, Iran, Yaman) are so close friend with china.
Why every time a US/UN delegate visit China, for implementing any reasonable policy, one of these rough powers do something which require consession from chinese and in return of easing pressure on chinese.
think about this Why on earth nkorea attacked skorea’s ship? only gainer of this whole episode is china, which got such a huge bargain that, US govt is not even talking on yuan-$ decoupling any more.
May be nkoreans didn’t attaked , some one else used their torpedo, parts of which were supplied by your favourite chinese.!!!
Sounds like a JFK assassination conspiracy. No one may ever know for sure.
I think u might see something in Korea soon which is the area no one expected. One cannot expect an attack on a submarine with no ramifications.
The declining volume on the upside these last months and increasing volume on the recent decline widespread have done damage to the market. If unemployment significantly declines mkt can go further on the upside and shift fromtreasuries to equities will pick up speed as investors not daytraders come into market.
Folks this volatility is our test time if we decide to follow the soon to be announced Jim new strategy. In Emerging (or Emerged) Markets plus or minus 20% volatility is more the rule than the exception. Happy training everyone!
yx,
You’re so full of bull! (pun intended)
How can we run out of bad news? Has Europe suddenly been fixed? No more inflation in China? Iran giving up it’s nuke program? Kim Jong Il saying, “Oops! My bad! Sorry!”? Every unemployed person in the U.S. finds a job over the weekend?
On a more serious note, I think I see what you’re saying. It’s not that things have been fixed, but rather the collective ADHD of the markets. It’s the old “no news is good news” cliche.
Ed,
More acurately quoted, “No noose is good noose” (ala Marty feldman?? I think)
Well put!
I’m not smart enough to know where the market is headed. There are a few minor things that I believe will push the market lower. Tax increases will encourage people to sell stock in 2010. Housing tax credit is going to go away, pushing housing prices down and building industry lower. I can’t completely discount the “sell in May and go away” idea either. Wait until the census workers are no longer needed. Then we get to see another bump in the unemployment numbers.
BW – I agree, looks like we’re entering a wide trading range. JJ’s comments yesterday about a bounce to 1120/1140 on the S&P still represents an opportunity for “traders” to make money.
The one thing that WILL happen over the week end is the outcome of the attempted plugging of the oil well. That could have an affect on the market. The Korean fracus could also affect the market. I consider these more ‘front page” today than euro crisis.
Jim,
I’m from Florida. Hockeysticks scare me. Can anyone tell me if I should be worried about the graph at the following link? (http://research.stlouisfed.org/fred2/graph/?s1id=NFORBRES) It shows levels of banks’ borrowed reserves for the last 50 years. I suspect this comes from infusion of money into banks by the Fed. Has this never been done before? The data doesn’t go back to the thirties but I’d be curious to know how it looked then.