News Rallies Are Doomed – Retest Of SPY 85 Possible!

Yesterday, the market gapped higher after the US followed Europe's lead. The Fed invested $250 billion into the largest financial institutions. This strategy gave banks a cash infusion and it will provide immediate relief. The prior plan of buying ill-liquid assets would have taken too long and the market wants immediate results. There were strings attached. The interest-rate payable on the preferred shares increases over time so that banks are indentified to retire the government's investment. Issues like executive compensation and dividend payments were also addressed. The Fed also guaranteed all new bank loans for the next three years. These actions prompted a huge rally. By mid-morning Tuesday, the gains had vaporized and the market was giving back some of Monday's rally. Pessimism and fear still dominate the market and it could not even muster a two-day rally from deeply oversold conditions. That is a very bearish sign. This morning, the S&P 500 opened 30 points lower. This decline was already brewing overnight and weak economic data added to the selling pressure. The PPI was down .4%, but the core was up a ”hotter” than expected .4%. Retail sales fell 1.2% and analysts expected at 8.7% decline. Ex-autos, sales were down .6%. On the earnings front, Coca-Cola, Intel, Genentech and Johnson & Johnson all beat estimates. My theory that solid earnings would carry us through this week was wrong. I thought that the capitulation low that we saw last Friday would spark a rally this week and that earnings, option expiration and short covering would fuel the move. At this stage, the market simply wants to see signs of immediate improvement in the credit markets. All of the recent actions will take at least a few weeks to produce results. The bears are very confident and any rally is squashed with ease. The worst thing that can happen in this market is a premature rally. Once the bears are able to generate selling momentum, it feeds on itself. You can't get long on any news because there is not a single defining event that will change the long-term picture. The bottom we are looking for will be established on an intraday reversal where no news is forthcoming. In other words, the market isn't expecting a bailout, a coordinated interest-rate cut, a stimulus package or any other form of intervention. It simply starts to form a base as natural buyers pull out their wallets. That will likely come as subtle signs in the credit market show improving conditions. This morning, the Baltic Dry Index is down again and China (the largest consumer of commodities) is showing signs of contraction. As a result, commodity stocks are trading lower. I still like fertilizer stocks (be careful) and tech is relatively strong. At this stage you should be flat after getting stopped out of your longs yesterday. Downside momentum has already been established today and now option expiration favors the bears. Tomorrow's initial jobless claims are likely to be weak and that has become a very important piece of economic data. Given the lame one-day rally without follow-through, I have to favor the downside today. I am long-term bearish and I have to be prepared for snapback rallies. On the short side, retail stocks look like a good bet. . .

Daily Bulletin Continues...