Markets have slid about 2% on two consecutive weeks. SPX is now off its September highs of 1465 by about 110 points or 7.5%. So far, this is a mild, even orderly correction.

The negatives have been a) an inability to muster even a modest bounce; b)despite rising bearishness, we are not at an extreme sentiment level; c) markets are seemingly reacting to both good and bad news with selling.

I would also add that I believe the media emphasis on the Fiscal Cliff is misplaced, but that remains the dominant meme. Many traders, for good or ill (mostly ill), take their cues off of that.

The positives are a) earnings could have been much worse; b) Housing remains a bright spot; c) consumer sentiment is good, business sentiment seems to be improving;  d) Greece has not caught fire and burned to the ground.

If we get a resolution to the Fiscal Cliff issue, that too would engender a short term rally. Indeed, I assume that part of the reason short interest has not spiked is the possibility of a resolution.

Regardless, watch for a bounce today or Monday. The key is whether it attracts some volume and conviction, or fails at new resistance levels, of which there are many.

Be back shortly . . .


UPDATE: November 16, 2012 8:23am

An emailer asks: “Does this change your allocations in any way?

No, I have not changed my investment posture in light of any possible bounce. When I make asset allocation shifts, it is because I am concerned with time frames of 2-4 quarters (Not days or weeks) and percentage changes in asset classes of >15% or greater.

The day-to-day noise and the 5-10% moves never enter our decision making. We don’t try to catch those, don’t know many people who can, and regardless, don’t want to have the high turnover, expenses and tax liabiilities even if we could.

Category: Markets, Trading

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.

20 Responses to “Time for a Bounce?”

  1. constantnormal says:

    Also, there is the taking of capital gains by the 1%, who clearly expect to see higher taxes ahead (who doesn’t?).

    With the 1% owning pretty much everything, that selling alone is enough to produce a pretty huge waterfall decline in stock prices.

    The Good News (if there is any) is that all this selling will generate more tax revenue than this segment of the population was contributing, and they won’t let all that money sit in short-term Treasuries for long, with the stock markets soon to be at single-digit PEs and dividend yields the highest in decades.

    I’m looking for an excruciatingly steep & deep decline, followed fairly quickly by a rapid rise back — to where I haven’t a clue.

    How that behavior convinces the sheeple to come back to the stock market is also beyond my understanding. Not that their tiny fraction of the national wealth is much of a contribution to the pot.

  2. Reminder – it is expiration for November listed contracts. There are several stocks “pinned” today as traders struggle with the gamma risk of a hours-long duration. This has resulted in up days on expiration Fridays followed by weak Mondays the week following. With the holiday-shortened trading week next week, I would expect some “strength” today to be mostly a head fake into next week.

  3. AHodge says:

    market feels like it wants to go up, post elect theatrics
    also gets seasonally the strongest about now
    but Europe and cliff are serious
    you can play long US against short europe
    but im just short europe now
    maybe leg into “cross” soon

    as anyone who looks at Dr eds Europe Industrial production by country charts should get
    their hair is on fire
    those IP numbers are scary
    entire eurozone down 2.5% from August–thats not annualized or yearly
    one month down 2.5%

    and show august IP up for europe was an abberation
    greece ireland portugal spain depression bound
    rest just recession bound
    those eurozone GDP # barely show a 3Q recession
    but 3Q gdp is inflated by the same faulty summer seasonal that inflated JAugust industrial production
    4Q will be much worse
    and GDP decline probably accelerate after that

    this i think is a great time to trade short an obvious statistical trend
    that europe tends no tto follow anyway
    and Euro folks–incl every official and trader i talk to
    are being deluded by pipe dream hopeful “we support europe” BS forecasts GDP flat next year
    when the data are screaming otherwise

    Dr Ed is still great –lets forget that Y2K thing….

  4. PeterR says:

    AAPL is the H&S canary in the mine at MA(322) and EMA(409)?

  5. 4whatitsworth says:

    I don’t see what has changed that would encourage risk does anyone really think the oportunity in the market is greater than the risk right now? We still have no clue what dividend rates are going to be next year. In addition if you are right about the bounce off the lows that put us 30% higher than we should be (Plausible in my view) then we are in worse shape than I thought.

    A better question is what would cause a bounce? After that question is answered then we can debate when.

    Things I am looking for that would bring me back in the market:
    -> Government looks like they will kick the can on the tax situation (they should not)
    -> I see a reason for housing starts to be sustained (a job boom)
    -> I see a reason that the current economic policies have a chance to work or that they will be changed. So far the most plausible argument is “it worked pretty well under Clinton”
    -> The market falls another 10%

  6. Hopefully, there is a bounce because the stock market is just about to flash a Dow Theory primary bear market signal. If today the Transports violate its 09/28/2012 secondary reaction lows at 4892.62, then a primary bear market will be officially declared. As of this writing (10:38 am) the Transports are at 4875, so prices better manage to bounce during the trading day.

    Here is the relevant chart:

    If the primary trend turns bearish, the odds favor an extension of the downward movement. Currently, the S&P has retraced ca. 8% off its 09/14/2012 highs. If we just have a “normal” bear market, we should further expect declines retracing even 20% or more.


  7. wally says:

    There are juicy bargains… good time for a bounce.

  8. techy says:

    What if the Dems and Repubs both dont come to agreement for next 3-4 months?

    Dems do have mandate to raise tax on >250k and they do want to get some revenue so that something can be done with infrastructure spending(better job scene in future).

    Repubs have the house, and they have full support from their voters to obstruct the dems.

    But I think Dems should be more worried because they will look bad since it is happening on their watch, but at the same time if they can sell hard to the masses that its repubs who are obstructing then maybe they wont get burnt by this at the same time when economy gets really bad by second quarter 2013, they can propose a huge stimulus and it will be very hard for repubs to oppose that? Not sure though seems like both sides have equal power, anybody has better analysis?

  9. 4whatitsworth says:

    Just listened to the press conference..

    Here is what heard: it was constructive and we know there needs to be a deal (possible can kick for everyone except the rich no spending cuts until late next year).

    Here is what I did not hear: (the government can cut costs and do more good for the needy or at the very least do more for the needy without continuing to accelerate government spending)

    My question still un answered: can you please tell us what dividend rates are going to be so that we can all make some decisions?

    The undertone.. yeah after years of discussions we finally understand the problem if we remove money from the economy by either cutting government spending or raising taxes growth slows and revenue goes down. Still we won so f*ck the rich and lets party.

  10. rekesk says:

    I’m surprised you say that housing remains a bright spot. Can you explain your reasoning behind this?

    Foreclosures are still taking place, unemployment is still high, and those with jobs are pretty cautious before making the leap into housing. If you are near a major city, housing is still mostly overpriced and quite the big leap to take. Also, the question that I ask myself and I think others do is: will a real estate purchase really appreciate in the upcoming years? My estimation is not much, and that’s due to the weakness in the job markets, which still hasn’t been corrected. So unless you have a clearly pressing need for a bonafide home (ie, have a family with two kids, need space to stay sane) why would you even put your money into real estate.

    Call me cynical, but I’m looking at the medium to long term picture here and I just don’t see solid ground, especially given current trends and conditions.


    BR: The data has been positive.

    Oh, you know I think it sucks, but the Fed has driven rates so low that its stimulated the sector (short term)

  11. Bob A says:

    I would add to the positives:
    we are not likely to see another 50% haircut in real estate values any time soon.

  12. Squashy says:

    I am a 99% schlub with a considerable amount of my assets in stocks. Over the past 20 years I’ve learned how to make money and avoid losing it in equities. A higher capital gains tax would have a more negative effect on my total net worth than it would on the 1%.

  13. wally says:

    Do what I do: rack up so much in losses that you are shielded forever.

  14. techy says:

    Squashy: do you work for a living?

  15. Well, the Transports closed down today thereby generating the Dow Theory primary bear market signal which I feared this morning:

    Certainly, not a good omen for stocks.

  16. seekye says:

    BR, thanks for your response to the emailer regarding your time frame reference (2-4 quarters) and the >15% comment.

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