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Good Reversal Day on Bad News …

Posted By Guest Author On December 8, 2008 @ 10:01 am In BP Cafe,Psychology,Technical Analysis | Comments Disabled

Kevin Lane is one of the founding partners of Fusion Analytics [1], 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.


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[1] Fusion Analytics: https://www.fusioniqrank.com/

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