Stock market bulls have strong hand, bottom in place?

The jobs number was better than expected and glad to see it. The private sector is once again creating jobs and they revised the ZERO number from last month. Glad to see that as well. However if the losses are coming from government layoffs, I know there are some who are glad to shrink government, but laying off teachers is not such a good idea. But that’s a story for another day.

Most of everything that was snowballing out of control stopped dead in its tracks. Why? Markets have come down to their relative April 2010 peaks. In other words to the first half of the move off the bottom from 2009. Those bulls are the stronger hands and if the recovery is to continue we can’t give back what we’ve gained. If the second half of a bull market is speculation and froth it’s reasonable to see those people leave the market. However in this instance it hard to build a case for froth and speculation in the period from September 2010 to February/May of this year. Markets mostly climbed a wall of worry but some people bought as a result of QE2 so there was some speculation involved. There’s a cardinal rule in poker where the chips go in the pot, stay in the pot. The same analogy applies here as the only way we see continued selling is if the old longs from 09-10 give up. There are reasons to think it could hold.

Copper had a great week on the back end of a 161 day window off the top and 144 weeks off its commodity crash bear market bottom. That’s excellent. It held the 200 week moving average. That’s excellent as well if you are rooting against a big recession. The Dow held the 200 week as well. As far as the economy goes, that is the single most important indicator of recession. It’s also something they never talk about on television. If we can just pull away from it, we’ll start feeling it trickle down throughout the country. So when there are good things to talk about, we’ll talk about it. Europe remains a touchy situation. It seems that every time bond or the Dollar gets to support or the NQ gets to resistance, the European situation gets irritated. I don’t understand what our friends in Europe are waiting for.

But it’s been a great rally with several things to like, besides Copper most notably is the Russell 2000 which has the readings, pitchfork and candle combination to give us a real bottom. Before you jump for joy, realize that bottoms are a process and the NDX bottomed in November 2008 and the rest of the market three and a half months later. By Friday the NQ came to a point where one would expect participants from last week to start cashing in some chips. Look at this chart; do you see how this rally came right up to the last portion of the prior rally leg? What does that mean? The last ones in bought with the idea that tech was going to retest the top. Those people were flushed out in the last leg down. So there is a huge void without bulls above Fridays high. If we can’t get any higher than that it could be a sign the rally is flaming out. However, early returns from Sunday night had taken out Friday’s high which means the bulls are starting to develop some staying power.

All of this is materializing at a time when the bond market is testing a key support ridge where buying has come in the last few times. By Friday they were attempting to hold the line. That’s why the rally stalled. Also, on the good jobs number we had a buying spree which is likely pure emotion. Once the regular market opened those people were met by selling. But I have to admit that while the top end of Friday’s range had strong bearish support the lows of Friday had strong bullish support. But as we saw Sunday night, bullish support is strengthening. The fact of the matter is we all went into the weekend watching and still waiting for the disaster scenario to unfold in Europe which doesn’t seem to materialize. Personally, I don’t think it’s going to. We’ve discussed this before. The main difference between this time and last time is now everyone is ready for it. As much as the Europeans are moving at a snail’s pace, they realize that if they don’t act, one of these countries is going to turn into the next Lehman. Black Swans materialize when nobody expects it. There’s something about the human condition we need to realize. We can’t comprehend the incomprehensible. But once it happens, the next time isn’t a surprise. To use a sports analogy how do you think an underdog like New Orleans can win a Super Bowl? They sneak up on everyone. The next year they surprise no one. Financial markets work exactly the same way.

But this week we’ll be watching to see how strong the bond market will rally. We’ll also be watching to see if the Greenback holds Friday’s levels or drops back to the 77 handle where there is bigger support. So while the early action looks more bullish than bearish it remains to be seen if bulls can really make their presence felt in the higher end of the range given the action from 2-3 weeks ago. I don’t see the NQ taking out the peak set at the end of September right now.

Next page: The role of China

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