Just A Bounce... - John Rothe | Portfolio Manager, Quant, Tech Geek, And Sometime Superhero To My Kids

Just A Bounce…

As the US stock markets looks ready for a quick bounce after the Thanksgiving holiday (a short term bounce is all I am expecting) the media talking heads are once again trying to find a reason for the bounce. Is it being caused by a strong Black Friday, a possible bailout for Europe from the IMF, or something else?

Let’s quickly take a look at the different scenarios:

Black Friday Sales

Personally, I don’t like the concept of using sales figures from Black Friday as a gauge on the health of the consumer. While the headlines make it seem that Black Friday was a success, over the weekend I kept seeing interviews with shoppers who are talking about “watching every penny” and how bad the economy is.

From MarketWatch:

At the Toys “R” Us store in New York’s Times Square, crowds started lining up around 3 p.m. Thursday for the company’s 9 p.m. opening.

Saul Vega came out of the store around 11 p.m. with his wife, 14-year-old son and six-year-old daughter with a Play Station 3 bundle for $200, which he said usually cost $300; and Thomas the Train set for $17.99, which he said was about a 45% discount. Both were part of the company’s specials.

For the first time, Best Buy set up monitors outside 120 stores on which shoppers waiting in line could watch movies and other programs.

“The economy is bad,” he said, adding he’s reducing his gift budget for his kids this year to $500 from between $1,000 and $1,500 in the past.

“We are trying to watch every penny,” Vega added. “Before we would have stayed home on Thanksgiving and we wouldn’t have cared about specials, but this year we’d rather stay on line. I want to be more cautious.”

Macroeconomic concerns have led to many forecasts of a slower season. NRF forecast sales to rise 2.8% to $465.6 billion, slower than the 5.2% increase last year. Almost 81% of shoppers said the economy will have an impact on their spending, compared to 78% in 2009, an NPD Group survey showed.

An Alix Partners’ survey showed 41% of shoppers said they plan to spend less on holiday gifts this year, up from 31% last year.

One strong shopping day does not indicate a strong shopping season – in fact it may indicate the opposite. A strong Black Friday may be indicating that the consumer is tapped out and that they will only buy when deep discounts are present.

Well, how about that IMF news? 

Over the weekend, rumors started to float around that the IMF would be bailing Europe out. However, an IMF bailout is very unlikely as the US is one of the key players in the IMF. Using US tax payer dollars to bailout Europe, when the economy is still bad at home, is political suicide.

More from Art Cashin, Director of Floor Operations at UBS:

We have been saying for weeks that we, along with Secretary Geithner, are concerned that European leaders have no mechanism in place to handle any sudden acceleration of the crisis. Basically, there is no financial fire department and no sign of one being hired.

Moody’s and others are indicating that time is running out and it may be a matter of days. ICAP, the currency trading facilitator, said it is testing its systems for a return to the drachma or even the Deutsche mark. Italian PM Monti admitted that the breakup of the Eurozone has been broached at meetings with top leaders.

This morning European stocks and U.S. futures are spiking sharply. The pundits are trying to pin the spike on everything from Black Friday sales to an IMF bailout of Italy. We think the spike is the reaction of a very oversold market to the resurfacing of the Sarkozy based rumor of a treaty deal for fiscal linkage. But, even if it’s true, can it be implemented quickly enough for a situation thought to be days away from crisis or climax?

The IMF bailout, already denied, was always unlikely since the U.S. is a key player in the IMF. Using U.S. funds for a European crisis is unthinkable in the current political environment. As to Black Friday, look what was said about last year’s Black Friday last November. Also, how could it help Europe so much?

Lastly, European bond markets are more placid and skeptical than their equity cousins. That supports the oversold causation thesis.


The Technical Picture

The market is simply oversold and is at a point where short term traders who are short the market (traders borrow, then sell shares of stock at a higher price – once their price target is reached, traders buy back the stock at the lower value) begin take their profits off the table.

Last week, I spoke about the possibility of a bounce at 50% retracement line:  50% Retracement. (Traders must not have read my article and instead let the market drop right through that level.) The next level to watch is the 61.8% level, which is where we are at now:


If the market cannot hold this level, the next stop will be the lows from September. A breakdown of the current level would also further support my thesis of a rare megaphone pattern in the market: Rare Megaphone Pattern Emerging

I would watch the 50 day moving average as a target for the short term bounce. Longer term, if the market can trade above the 200 day moving average then we would have a false megaphone pattern and the markets will see a Christmas rally.


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