RIGHT ON CUE

As widely expected after over two weeks of losses, the markets bounced back today with large gains in all the major indices.  Just before the market close, the S&P is up 1.6%.  As we have mentioned here and in our bi-monthly newsletter, the bounce, while important, is not conclusive that we have seen the bottom.  The key will be if the markets can hold onto these gains for the next few days.  We will have much more confidence in the rally today if the gains can be kept and if the next down turn can be met with buying.  Now it gets interesting...

MASSIVE TOP IN GLOBAL MARKETS

MASSIVE TOP IN GLOBAL MARKETS - Louise Yamada is one of the most respected market technicians and we always listen to her analysis.

IPO MANIA

Tomorrow marks the long awaited Facebook initial public offering.  Will it make a difference to the overall negative tenor of the market?  After today's 1.5% decline, the S&P is down over 8% since the correction started on April 2nd.  As we mentioned in our March 27 newsletter, "Which do you think more likely - another 10% rise or a 10% correction? We would guess a correction."  Unfortunately, our comments now look timely and prescient as we are nearing that 10% mark.  The market is very oversold and due for a bounce of some sort.  With options expiration tomorrow and the excitement generated by the Facebook IPO, the bulls may get their long awaited reprieve.   Much technical damage has been done over the last few weeks with multiple levels of support broken.  It will take much more than a one or two day rally to overcome the damage done.  When the bounce comes (and it will at some point), the move may be explosive and create all kinds of buzz on CNBC and the other financial networks.  However, the true test will be how the market acts once the initial flurry of buying (or short covering) has run its course.  That should happen within a few days and then we will see if the downtrend that started 45 days ago has more to go to the downside.

There are many reasons to be cautious now and we have significantly lightened up our portfolios over the last few days and weeks.  We are currently raising cash and waiting for the next buying opportunity when the odds are in our favor.  As our sell stops are hit, we will continue to liquidate positions until this market stabilizes.  

ECONOMICS TRUMPS TODAY

The widely watched and anticipated jobs report was released this morning and showed a disappointing 115,000 in job gains.  Though the unemployment rate dropped to 8.1% (from 8.2% previously), that figure is dropping more from workers leaving the work force or abandoning their job search than an actual reduction in unemployment.  All in all there is very little to like about the numbers and Wall Street punished stocks with one of the worst days in the last 6 months.  The NASDAQ led the fall as it shed 2.25%, the S&P lost 1.61% and the Dow rounded out the major indices by finishing 1.28% lower. 

After approaching the top of the trading range formed over the last month, the market is now trading near the lower part of the range.  Mondays after the job report often reverse some or all of the initial reaction so we will have to see if that holds true here.  Until such time as the market breaks through on the upper or lower end of the range, much of the day to day movements are just noise.  Today was a little louder however and the continued hint of a slowing economy puts the bears firmly in control heading into next week.  We'll see if the generally very good earnings continues next week and if it can shift the balance once again.  Spain and the rest of the European issues continue to smolder so there is reason for caution.  Will "sell in May and go away" prove prescient again this year?  It has for 8 of the last 11 years so we shall see. 

Our portfolios have held up extremely well and should again today with high yield and municipal bonds generally up a little or down a little today.  As always, please call us to discuss your individual accounts or if you would like additional information about Bills Asset Management.

EARNINGS OR ECONOMICS?

Over the last week, earnings have trumped economics as earnings reports have been outstanding and economic reports have been anemic to poor.  Europe continues to boil over as Spain is nearing where Greece found itself several months ago.  Apple, Amazon and a host of other companies have posted blow out earnings that have provided enough fuel for the markets to withstand the onslaught of negative economic news.  We will continue to see a flurry of earnings over the next couple of weeks and hopefully they will continue to impress and lead this market higher.  QE3 also lurks in the background and there is talk again that "bad news" is "good news" in that continuing bad economic news will force the Fed to launch another round of liquidity.   The latest Fed easing is scheduled to come to a close at the end of June so we may see something sooner rather than later if the economic news continues to falter as we head into the summer season.  Sell in May?  We'll see but for now the market is weathering the storm and continues to be bound by the highs of April 2nd and the lows of April 10th.   The S&P currently trades in the middle of this range and a break in either direction will likely set the stage for the next month or two.  

Market Vulnerable?

For the first time in a few months, the markets are showing signs of vulnerability.  Over the last few days, market volatility has picked up with larger than usual moves in both directions.  This indicates a struggle between the bulls and the bears.  Key levels we are watching are the S&P highs of April 2, 2012 (1,419) and the lows of Monday April 10, 2012 (1,358).  A break to the upside would lend credence to a resumption of the bull market trend, while a break below would indicate a more significant correction is at hand.  That correction could stretch 3-7% from the levels of yesterday's close.  Earnings will drive this market over the next 2-3 weeks and surprises either way will push the market one way or another.  The return of European market weakness is a harbinger of potential troubles ahead.  There will be lots to look at and evaluate over the coming days.

MAKE OR BREAK

The markets have trended up with low volatility since mid-December.  With little to no correction or pause, the markets are getting a bit extended at these levels.  A healthy market would do a little backing and filling at these levels to digest the gains and prepare for the next surge upward.   In contrast, a continuation of this pattern would be deemed unhealthy and would set the stage for an unpleasant and potentially steep sell-off down the road.  In principle, the farther an instrument advances without a pause or rest, the more pronounced the inevitable pause/rest/selloff will be.

With the recent lack of volatility, is the market trying to tell us something or just ignoring reality?  Some would argue the latter but the market is usually right and the decreased volatility is more likely the market's response to what it deems likely outcomes in the US and abroad.  The low volatility uptrend will not continue indefinitely and is getting a little long in the tooth.  The next correction, whenever it comes, will tell us much about where this market is headed over the foreseeable future.  The major indices are at or nearing their 2011 highs and thus approaching significant resistance.  Pushing through these levels would be a huge jolt in the arm for markets that seem to want to go up.  There is still much that could derail the weak economic recovery.  The most obvious source of potential problems is Europe.  It is hard to envision a scenario in which Europe overcomes their current sovereign debt problems without major economic upheaval, but if they were able to figure out how to accomplish just that, this huge negative for the global economy would become a powerful positive force.

The Federal Open Market Committee (FOMC) meets today and tomorrow so market action may be muted until the meeting is concluded.  There will not be any change to the two key interest rates that the Fed controls directly but there could be changes in the statement language that hints of future Fed policy.  Several voting members have changed since the last meeting and the new makeup of the FOMC is considered to be more dovish on inflation and therefore more apt to consider another round of quantitative easing (QE3).  Any hint of QE3 would likely be positive for stocks in the short-term.  If QE3 is a valid Fed alternative, they are likely to act soon so as to avoid any perception that they are trying to influence the election process.  Additionally, if there is another round of easing it will almost certainly be aimed at the mortgage market to attempt to restart a lagging housing market.  This will be an area to watch closely as things develop over the coming weeks.  Lots to look at and digest.  It is always interesting...

Sam and Bo