Friday, May 01, 2015

NASDAQ waits for a recovery bounce

Seriously, there was no great earth-shattering fundamental news that would account for the sharp decline of NASDAQ on Thursday. Earning were no more mixed than before, and the GDP number was already baked in the cake and no surprise to even people living under rocks. This was strictly a technical move, probably simply because upwards momentum had evaporated and a bit of consolidation was sorely needed. Sure, that was more than a little consolidation, but that's the nature of the market we are in. And with all the hedge funds scratching around to make a quick buck, betting on a reversal was a slam-dunk when upwards momentum ran out of steam.

Now the big question is whether this really was just a bit of consolidation or whether this is merely the start of a larger downwards swing in the wider trading range.

In any case, we remain within a trading range. It's just a question of how wide and deep the range is. It could be moderately wider and deeper than what we just witnessed this week, or we may already have seen the worst of it already yesterday.

There is also some anxiety that a fierce "sell in May and go away" sell-off may commence, like in May, which is like today. Personally, I think that seasonal trading pattern is overblown, and not so reliable, and that we may already have experienced that selling in anticipation. So this may be a classic case of a sell-off on rumors and then a rally on relief that the news is behind us.

NASDAQ futures are up moderately, indicating a nice recovery bounce at the open. As always we must caution that futures and the opening move are not reliable indicators of the market trend for the rest of the day. The big question is whether people will sell into the early bounce and kick off another wave of selling, or whether people will pile on and kick off a wave of forced buying of short covering. There is actually a decent chance that we could recover all or at least a decent fraction of Thursday's losses. No guarantee, but at least a chance. On the flip side, it wouldn't surprise me at all if the sell-off resumed and was even steeper today.

The ISM Manufacturing report may provide a decent catalyst for a recovery bounce today. It comes out at 10 AM, after the market has opened. I expect it will be reasonably decent, showing at least a modest recovery after the bleak winter.

It is a Friday again, so a fair fraction of short-term market participants will close at least some of their positions ahead of the weekend when anything can happen. If they are net long that means more selling, but if they are net short that means buying. Given the downwards pressure this week, I suspect the latter, which is what NASDAQ futures seem to be pointing towards.

Even if we do get a decent recovery bounce today, there is a real risk that it could merely be a dead-cat bounce, with further selling next week. No guarantee, just a risk.

I did a fair amount of dip-buying yesterday, not because I was confident that the bottom has been reached, but because the relative value is decent. I'll buy more on any further dips. My goal with these dip buys is to hold for one to three weeks for a 5% gain. I have the flexibility to hold for longer, but that's my preferred time frame.

Fed funds futures have settled again on pointing to December as the likely time frame for the liftoff of interest rates, with a bit less than a coin-flip chance for October. Personally, I think it will be in October. Futures are pointing to only a second hike in March with the interest rate being only 0.75% next April. IOW, higher rates are a non-issue for stocks for the foreseeable future.

-- Jack Krupansky

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