Rebound from sell-off part II

The market opened up half a percent this morning, traded down to flat, and then rebounded to the opening levels in morning trade.  Seems to be a modest relief rally after yesterday’s large sell-off.  IBD moved it’s market outlook back to Market in Correction after yesterday’s price action.  Momentum systems do very poorly in sideways markets, often giving false signals and leading to buying the peaks and selling the troughs.  Just something to be aware of for anyone following a momentum strategy like CAN SLIM.

It will be interesting to see how the day ends.  Typically declining markets will show early strength and then weaken into the close.  We’ll see if this modest bounce ends in a slide this afternoon or if it can add to its morning gains.

I still think there is some downside remaining because too many people still have a buy the dip mentality.  They will be proven right soon enough, but the market needs to shake their confidence first.  The markets have a habit of convincing you you are wrong before proving you right.  We very well could see that come into play here as we drop under 1300 before rebounding.  Once everyone’s given up on the rebound it will be safe to wade back in after everyone’s sold in anticipation of a bigger decline. Of course an unexpected and highly bullish headline out of Europe could flip sentiment and the traders sitting on the sidelines could start chasing the market higher.

Staying with Europe, it seems a lot of people are worried Greece could be the next Lehman Brothers.  But the truth is Lehman and Greece are 180 degrees opposite.  Lehman caught everyone off guard, the market did not foresee the vulnerability of the banking system, and Lehman’s implosion happened over just a couple months.  Compare this to Greece that’s been a highly publicized, slow-motion, train wreck, 2.5 years in the making.  For the public markets, these  two events couldn’t be further apart in terms of expectations and what is already priced in the markets.

The other big catalyst is the Supreme Court’s ruling on Obamacare.   Virtually everyone is expecting a repeal of the individual mandate, so that has long been priced in the market.  At best it will lead to a temporary bounce before sell-the-news kicks in.   I actually expect a piecemeal repeal of Obamacare will lead to additional uncertainty since it will be impossible to predict how Congress will fix it.  That uncertainty will pressure the markets more than if Obamacare is upheld.  The markets prefer certain bad news than the unknown because the markets tend to price in the worst when dealing with uncertainty.

With IBD moving the market in correction, disciplined CAN SLIM investors need to resist the temptation to buying shares before the market triggers a follow-through-day, which is a large up-day on large volume at least four days after the market put in a low.

Stay safe