Stock Market: Tuesday saw short covering of trading positions ahead of the New Year holiday.
A rally is not in harmony with the prevailing Bearish Primary Tide Trend and, therefore, appears unlikely to be anything more than a Dead Cat Bounce which probably will not last long or travel far.
VIX shows waning fear. Now at 41.63, the “Fear Index” fell to a new 3-month low and remains in a remains in a 6-week downtrend.
Stock indexes were down 6 of the past 9 trading days, down for the month, down for the quarter, down for the year, and are down for the decade. Therefore, established trends cannot be Bullish. The trend is your friend.
There is no change in my conclusion. The Bearish Primary Tide Trend dominates the stock market. With the business conditions outlook deteriorating alarmingly, with tight credit conditions, with the possibility of further financial risks, with probable unintended consequences of government bailouts, and with massive fund redemptions and liquidations likely, prudent investors may continue to focus on capital preservation.
On Tuesday, major stock price indexes gapped higher on the open but reversed to the downside within the first minute. Stocks bottomed at 10:00 a.m. at a level above the previous day’s close. Prices rose again in 2 up waves to a high around noon, drifted moderately lower to a higher low just before 2:00 p.m., then rallied above the highest highs of the previous 5 trading days into a strong close at the highest levels of the day. The Standard & Poor's 500 cash index (890.64) closed up 184.46 points, or 2.17%. Total NYSE volume rose 8%, indicating moderately greater demand for stocks compared to the previous 3 trading days but still very low volume compared to the previous 3 months.
By very recent standards, the market was unusually strong in the final hour. Stock price indexes closed with relatively high momentum very near the highest level of the day. This appeared to be short-covering of trading positions ahead of the upcoming holiday, which no doubt will be used as five-day vacation by many traders. A rally is not in harmony with the prevailing Bearish Primary Tide Trend and, therefore, appears unlikely to last long.
Some pundits claim the government can simply print unlimited quantities of money and bail out everybody. Others claim to be encouraged because recent economic data, although very bad, has not been worse than expected. And this week a Wall Street analyst proclaimed that banks are now buys because they will be helped by falling interest rates, rising deposits thanks to increased FDIC insurance, and government economic stimulus. But such Bullish talk ignores well-established trends pointing to further job losses, home loan defaults, consumer credit card defaults, commercial mortgage defaults, corporate loan defaults, LBO write-offs, and massive leveraged derivatives tied to falling financial instruments still on highly-leveraged bank balance sheets. With such leverage, further equity total wipeouts seem possible, assuming present trends continue—and, after all, what is there to stop them? Therefore, Wall Street optimism might simply be overreaching for something Bullish to say, which has long been the way of Wall Street.
Spotlight on event stocks: Here is a stock screen I designed to pick out potential event stocks, both Bullish and Bearish. Sometimes, stocks with large changes in price and volume are revealed to be deal stocks, sooner or later, or are the subject of some other extraordinary events, positive or negative.
