Equity Markets: Just a Pause or Something More?

The bipolar nature of the US equity markets was on display on Thursday. The day started off with US stock futures shaking off the post FOMC sell-off, just as President Obama started his press conference at 8:00 PM Eastern Time.

The Japanese stock markets made a big move up when the reopened after a holiday, after Japan’s Factory Output rose at twice predicted pace. The European markets too picked up the bullish bias from Japan, ignoring the highest unemployment rate since 2005. At 8:30AM on Thursday, prior to the release of economic data, S&P Futures were trading at 880, having reached a high of 887 earlier in the night.

Though the economic data was mixed, the equity market continued in the bullish mode, staying well above the important technical level of 875, with the small cap Russell 2000 crossing the 500 barrier.

With the large gap-up above the resistance level, the market showed an amazing ability to shake of mixed news, including a drop in personal income and spending and the 13th week of record continuing job loss claims.

The data about income and spending showed that though personal spending may have gone up from the doldrums of Q4 2008, it was highly unlikely that the consumer spending could lead the US out of the recession, unlike what the GDP report was supposed to suggest. As I had noted yesterday, this was reflected in the poor performance of leading consumer driven stocks like Amazon and RIMM on Wednesday.

Chrysler Bankruptcy: An Excuse for the Sell-Off
Though news leaks had already indicated that Chrysler would file for a Chapter 11 bankruptcy, the market had ignored the news till the official announcement was made.

However the announcement triggered a sell-off which lasted till the end of the day, with most indices giving up their gains and finishing flat.

Window Dressing: Not Much Help

The market typically closes strong on the last day of an up month, when portfolio managers bid up well performing stocks to help their monthly returns look better.

As I had noted in this twit (also available at my blog), I expected a sell-off right after the 4:00PM closing price, allowing fund managers to mark their books high, while hedging

their risk right away. This S&P 500 futures (ES) fell from a 4:00PM close of 869.75 to 865 by 4:15PM. The Russell 2000 futures (TF) started their slide a few minutes before the close, sliding down almost 2% in 5 minutes.

A Pause: For How Long?

This was the second consecutive day, where the indices could not hold their gains above the 875 level. Some observers have noted that the overall volume at this critical juncture on Wednesday was anemic. The overnight jump in futures, suggest a lot of technical buying by commercial institutions increasing their long exposure, but not a broad based purchase of equities. During the early part of the trading session, the indices were unable to break-out of their opening range, though they maintained the initial gap up levels quite well.
The Chrysler bankruptcy and the drop in income and spending did bring a dose of reality to market participants. Things are not getting worse, but not necessarily getting significantly better. This price action suggests that the market is likely to take a pause before it attempts the next leg up of this rally, especially since major indices are bouncing against major resistance levels (e.g. 200D SMA on the QQQQ).

This market rally has confounded many pundits and burnt both bulls and bears at key levels. It is not clear whether this dose of reality will weaken the optimism inspired the sighting of green shoots.

And even if the optimism wavers a better than expected report can easily stir up the bulls again.

I continue to remain primarily in cash with some index puts in my trading portfolio.

I added a speculative long option position in the refiner TSO, which may be targeted as a buy-out candidate.

I reduced my CTSH long option position during the rally, and closed the short leg of an existing put spread position in APPL leaving me net short. I did not close my TLT long bond position since

I expect some pullback in yields as risk appetite wanes.

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