Kevin Lane is one of the founding partners of Fusion Analytics, and is the firm’s director of Quantitative Research. Prior to joining Fusion Analytics, Mr. Lane enjoyed success as the Chief Market Strategist for several sell side institutional brokerage firms, where he made unique and savvy market predictions. In those capacities he oversaw the firms’ research departments and was the main architect for developing their proprietary stock selection models and trading algorithms. Mr. Lane produced a broad range of widely followed institutional research publications ranging from industry specific notes to quantitative/fundamental reports on individual stocks. His buy side clientele consisted of many of the nations top money managers and hedge fund managers. Mr. Lane is a member of the Market Technicians Association and earned a B.S. in Business Management from the State University of New York at Plattsburgh.

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With a headline news story that read – the most jobs slashed in 34 years Friday’s reversal was very impressive. Again this was a Friday, the last day of the week, the day where investors are least likely to want to increase exposure as anything can happen over the weekend, yet on we repeat a Friday (and again in the face of horrible headline news) the market rallied from down big to finish up big. Again if we haven’t said it enough already – VERY IMPRESSIVE !!

Now granted one day does not give one enough evidence to say this is the start of anything major just yet. However it does for those with a little higher risk tolerance suggest it may be worthwhile to take a shot here (on the long side) to catch a good tradeable rally.

There is an old saying on Wall Street called the ” Cyrano Principle ” (A reference to Cyrano de Bergerac, a french dramatist and fictional character who had an enormously large nose). The idea is when it it as obvious as the nose on your face to everyone then it is not a surprise anymore. The markets reaction to the jobless claims number suggests the Cyrano principle at work as a seemingly bad data point was ignored and instead of fueling a deeper sell-off it actually created a big reversal – Why ? Because given the regularity of bad news this did not catch anyone by surprise and is now most likely discounted. In other words what more can be about the economy (or the markets) said that astute market participants haven’t taken into account in their near 50% haircut on the S&P 500 (housing market is terrible ? Nope they already figured that out. The economy is weak and likely will lead to more layoffs ? Nope they figured that one out as well. There are a lot of bad loans out there ? Nope they already figured that out as well.

SO REMEMBER IT IS NOT THE NEWS THAT MATTERS IT IS HOW THE MARKETS REACTS TO THE NEWS THAT MATTERS MOST AND FRIDAYS REACTION TO BAD NEWS SUGGESTS MOST INVESTORS HAVE DISCOUNTED PRETTY MUCH ARMAGEDDON.

Internals improved on Friday with NASDAQ up to down volume scoring a 6.8 to 1 ratio while advancers bested decliners by a 2.26 to 1 rate. Over on the NYSE it was 5.95 to 1 and 2.38 to 1 respectively. If we could have gotten better advance to decline stats (like 4 to 1 or better on both exchanges we would really be pounding the table on the long trade here, however a little over 2 to 1 advancers to decliners doesn’t suggest an institutional panic to flood back into the market just yet. However Friday’s action does suggest to us it’s worth seeing the glass more half full here ! If we can get some good early morning follow through (without a fade after the first hour) expect there to be more upside into year end.

Category: BP Cafe, Psychology, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “Good Reversal Day on Bad News …”

  1. John Borchers says:

    Easy money.

  2. Chief Tomahawk says:

    So long SRS! Hellooooooooooooo TBT!

    With all of the money which has flowed into the ten year recently, and additional supply coming later this week to feed “Bailout Nation”, etc., equities would just love that money to come back.

  3. Boomer says:

    So last week or so you thought if we hit 900 this would be a tradeable rally, think that is still is the case?

  4. DP says:

    I suspect there are some hedge fund managers out their rubbing their hands with glee at a chance to fade this at 3pm. I hope I’m wrong and still mostly long (commodities, so having a good day after a very bad week last week), but just don’t believe in these pops anymore. Would much rather see 1% a day for 10 days.

  5. kantie says:

    You write: ¨Why ? Because given the regularity of bad news this did not catch anyone by surprise and is now most likely discounted.¨

    The bad job numbers DID catch the more than 70 economists/analysts Bloomberg and Marketwatch had approached by surprise. The pre-8:30 estimates were around – 350.000 jobs; nobody had estimated even close to the headlined 533.000 job losses. How could it have been discounted?
    Also, look at this:
    September: initially published – 159.000, later revised to – 284.000 and now revised to – 403.000 !!!!
    October: initially – 240.000, now revised to – 320.000, next month revised to ? !!
    November: initially – 533.000, next month revised to ? and later on revised to ?
    Hence, the Bureau for Lies and Statistics had to increase their initially published number for September by 150%! No economist/analyst had expected such a hugh correction: how could that have been discounted?

    On top of that: the market did react negatively: Dow dropped 200 points for the first hours of last Friday.

    In addition, you mention an S&P500 haircut of 50%. But do you not agree that the S&P500 high was way over the top? The GDP growth of the last 10 years was fully debt financed, i.e. no growth at all. So perhaps only a more realistic 10% haircut till last Thursday.

    Given all this, could it be that helicopter Bernanke is using ¨the second arrow in the FED´s quiver, i.e. the provision of liquidity¨ by buying equities in the hope of giving the market a boost up (which then might run on for a while as people start talking about a rally, and nobody wants to miss out on one)?

  6. leftback says:

    You have to fade these rallies, but not at 3.
    Try 3.59 instead.

  7. TrickStar says:

    TrickStar Says:
    November 24th, 2008 at 4:32 pm

    Last Monday nite on BP, I called for a 500 pt. one day drop in the next five trading days.

    While I never got my 500 pts., two days over 400 exceeded my expectations.

    On Thursday of last week, I called for the 15%-20% dead cat. As of today, that came true as well.

    The beauty of this market is that even a joker like me can get a few right.

    Oh, by the way, the equity markets hit bottom at 750 last Thursday. They don’t ring the bell.

    Calling it out. 750 was the bottom.

    Who do we have to thank? Well, us, the US taxpayer.

    750 was the bottom.

  8. DP says:

    Sometimes it’s nice to just be wrong, specially when you bet against yourself.

  9. TrickStar says:

    As I was just relishing the rare opportunity for me to brag about success, I realized that I haven’t traded the volatility in two weeks. Why? Because I haven’t seen a single sign that I could interpret as offering a me solid hypothesis. We’re in no man’s land – but getting close for a short opp, I think.