Yesterday, stocks gapped higher when doomsday fail to haunt Wall Street. UBS, DB, LEH and TMA all secured capital. The financials lead the way higher and the S&P 500 gained over 40 points.
As I have noted in today’s chart, these big one-day rallies have a history of failing the next day. That is not the case today and buyers are adding to yesterday’s gains. The SPY has broken a downtrend line and it is trying to move above horizontal resistance at 138.
A better than expected ADP employment index is helping to fuel the rally. As a word of caution, this number tends to overstate employment. BBY posted solid earnings and raised guidance. That is helping the entire retail sector. Overseas markets were also very strong and the Nikkei was up a whopping 5%.
As I’ve been saying, the double bottom support level looks like it will provide a long-term floor to this market. However, don’t expect a snap back rally. DB took an additional $4 billion write-down, UBS took a $19 billion write-down and Thornburg was taken over for pennies on the dollar based on its price a few months ago. It is hard to see the good in this news. While the bloodbath seems to be over, financial stocks have diluted their ownership and they still need to figure out how to generate top line growth. I view yesterday’s move as a “relief rally”. When worst-case scenarios did not play out, buyers stepped in and the shorts ran for cover.
Consumers are tapped out. The unemployment rate is rising, assets are falling (investments, home prices), purchasing power is declining (inflation, a weak dollar) and aging baby boomers are scrambling to fund retirement accounts. I am not casting gloom and doom on this market, I am simply pointing out that there are many headwinds blowing. This morning, the Fed Chairman admitted that economic conditions are deteriorating and that the probability a recession is elevated. This is a trader’s market and it will be for quite some time.
The key to making money in this environment is to buy the dips and sell the rips. Picking the right stock’s during these moves is also critical and it is best to keep your position sizes smaller than they would be in a trending market.
As the market continues to extend itself, I would encourage profit taking on long positions. If the initial jobless claims come in lower than expected tomorrow, that will mark the second consecutive week of improvement. If this unfolds, there is a chance that the Unemployment Report won’t be as bad as expected and you should maintain a small portion of your longs. If the initial jobless claims number is weak tomorrow, exit long positions. This market will be bumping up against major resistance and the upside gains are much smaller than the downside risks.
The nice thing about current conditions is that you can buy dips below SPY 130 with confidence. Trade the range SPY 125 – 145. For today, I believe this market will continue to grind higher and squeeze shorts out of positions. Take advantage of the strength and scale out of some of your longs this afternoon.