Market Overview

The Case For: The Bulls Keeping Up The Pressure

Share:
The Case For: The Bulls Keeping Up The Pressure

The bulls (or perhaps more accurately, the bull algos) put on quite a show again on Tuesday.

For the fourth day in a row, stocks rocketed higher and the S&P 500 finished with the best one-day gain in more than a year. Not bad for a market that had been left for dead four days ago, right?

Remember, it was just four days ago that the sky was falling. The market was cratering. There was fear in the air. Just four days ago, the S&P was down 7.4 percent from its high -- and it took heroic measures (and some surprisingly kind words from Mr. Bullard) to keep the decline from reaching double digits. Just four days ago, a fair number of investors were ready to head for the hills and never invest in stocks again.

Four days ago, any long exposure felt like way too much exposure.

Four days ago, investors were calling worrying about their portfolios, their strategies and heck, even their financial futures. Four days ago, angst was the watchword. And four days ago, it seemed that the bad old days had returned with a vengeance.

Now that the S&P has spiked up 6.6 percent from the intraday low seen on October 15 (and +4.2 percent on a closing basis), everyone is breathing a little easier. Everyone now sees that what the algos take away can also be handed right back -- in short order.

However, the big rebound, which came directly on the heels of the big decline, left a fair number of folks scratching their heads.

Wasn't the market worried about the potential economic damage from the Ebola outbreak?

Wasn't Europe supposed to drag the global economy back into a quagmire? Wasn't China a problem? Wasn't ISIS a concern? Wasn't the U.S. economic recovery at risk?

Wasn't there a great deal of worry about deflation? And wasn't this list of worries the reason behind the market's month-long swoon?

Saying All The Right Stuff

While the corrective phase that began on September 19 may or may not be over, it is safe to say that the dire outlook that was firmly in place last week has clearly faded. The question now on many investors' minds is why on earth did the market just turn on a dime?

First and foremost, James Bullard reminded the bears that the U.S. Federal Reserve was not out of bullets. In effect, what the St. Louis Fed President told a TV audience was that if the market didn't start behaving better soon, Ms. Yellen and her merry band of central bankers would take action.

Bullard basically reminded traders that the Fed was not likely to stand idly by and watch a bunch of computerized trading algorithms ruin the economic recovery that has been so long in coming.

Related Link: Time For Investors To Buy The Dip?

The mere threat of the Fed pulling back on the taper was enough to stop the stock rout in its tracks five days ago. You see, traders were reminded that the FOMC is now data-dependent. Therefore, if the data is bad, the Fed could actually try to do something about it. If traders have learned anything over the last five years it is that markets just love it when the Fed refills the QE punch bowl!

But Wait, There's More...

While Mr. Bullard's reference to changing up the Fed's current game plan was enough to cause stocks to rebound more than 40 points last Wednesday, it took some additional well placed words for the bulls to rediscover their mojo.

There was word out of Japan that PM Shinzo Abe might need to rethink the idea of implementing a tax that analysts have been worried about.

There was the announcement by the People's Bank of China that they were injecting a bunch of yuan into the banking system. Oh, and the economic data released this week wasn't nearly as bad as had been expected.

There have been no announcements of new Ebola cases in the United States. This doesn't mean that the problem is solved, of course, but it also means that there is no burgeoning epidemic, either.

There was also word that Apple (NASDAQ: AAPL) had hit the ball out of the park with its latest earnings report. To lots of investors, as Apple goes, so goes the economy and the stock market.

And Then There Is Super Mario And His "Bazooka"

Finally, there was word out of Europe Tuesday morning that the ECB was talking about buying corporate bonds, with some reports suggesting that this could start in early December.

The thinking here is that the ECB could direct its bond buys at the heart of the problem: the banking industry. Therefore, the potential for the debt crisis to once again become a contagion and threaten the fabric of the eurozone could -- in theory, anyway -- be reduced dramatically.

Yes, it is true that the ECB has been long on talk and short on action.

Related Link: Traders Have Seen This Movie Before

However, it is safe to say that the mere threat every once in a while of Mr. Draghi bringing out his "bazooka" has been a pretty effective tool in keeping things together across the pond.

Crisis Averted (Again)?

The end result has been an impressive move in the stock market. Suddenly the S&P 500 is back above the seemingly all-important 200-day moving average, and just like that, the venerable index is also back above the August low. As such, the technical picture has been improving.

S&P 500 (NYSE: SPY) - Daily

spx_daily_10.21.14.png

Unless a new fear materializes, it appears that the recent decline was yet another in what has become a very long string of "healthy corrections" that tend to occur in a bull market.

However, the bulls are most definitely not out of the woods just yet as the downtrend that began in mid-September remains intact.

Thus, it will be important for the bulls to keep up the pressure. For example, a breadth thrust would be a welcome sign right about now. On the other hand, if the small caps begin to weaken again, it could become a problem. Therefore, it is probably best to remain on alert for a while longer here.

But the next time the market looks like it is about to come apart at the seams, it is important to remember that it just doesn't pay to "fight the Fed(s)."

Tags: Ebola FOMC James Bullard

Posted in: Small Cap Analysis Top Stories Economics Federal Reserve Trading Ideas Best of Benzinga