Markets Due for A Bounce

So, the market is finally realizing the futility of its situation. We are now mired in an environment where the market participants view the glass as empty. That is, good news is bad news and bad news is well, BAD!

Recent "dovish" FOMC minutes revealed that the powers that be are very concerned about continued deterioration of the economy related to the credit crisis and recession is at the forefront of their radar. However, instead of calming the markets, the FOMC minutes seemed to have a negligible effect on the market sentiment. That is, no one trusts this market right now. Technology (save for some solar stocks and agriculture plays), retail, and just about anything related to the stock market has been aggressively sold the past few days of the new trading year. Market participants cannot sustain nor are they willing to attempt to initiate a new rally. Most bounces are being sold into or shorted.

But, we are headed into the "over sold" territory. It is not the type that will initiate an aggressive snap back rally that we experienced after things got really out of control in early November 2007 but a reflexive dead cat bounce is in order. The market has failed to take out the 1445 level on the S&P 500 level on more than 4 occasions now and many stocks seemed to be holding their 50 day moving averages quite aggressively: Google, BIDU for example.

The market has all but discounted the effectiveness of the FED as having the ability nor the desire to help rejuvenate the markets in the same way that Alan Greenspan FED did in 2001 to stimulate the economy. We are in a different environment now and the FED does not have the same flexibility to exert stimulus via rate cuts in the same way that Greenspan's FED did. For too long the market participants have been calling for an aggressive FED cuts (Cramer, Kudlow, and other permabulls) but the target EFF (Effective FED Funds) prevents the FED with wiggle room. This is why at the last FED meeting they were only able to cut 25 basis points on the FED Funds and 25 basis points at the discount window. All of this lead to the current market sentiment which is obsessed with a recession- and for good reason.

I hear a lot of pundits who wax optimism that we will not enter into a recession in 2008. That we will miss it "barely" and that growth will resume. Can that happen? Perhaps, but not likely. The recent contraction in the ISM Manufacturing data coupled with ADP jobs data shows that we are in a recessionary environment. With housing still mired in the quagmire and real wealth being depleted as a result, straining the consumers, our economy may already be in a recession. Just look at the results posted by Bed Bath and Beyond (BBBY) yesterday. Granted, BBBY is not the vanguard of economic prognostication. However, their bleak 2008 outlook and guidance further adds credence that the consumers are quickly fading away. I shudder to think about the report next week on Holdiay sales in the retail environment, from which I gather, was one of the worst in recent memory.

One of the big mysteries out there recently is the sudden rise of Amazon (AMZN) on an upgrade by UBS on Wednesday. From my metrics and studying released data on online spending, it appears that Amazon (AMZN) may miss their already guided down estimates for Q4. This bears watching because if true, AMZN will take a beating when it reports earnings on January 30th.

Having said that, the markets have been in a foul mood lately for the past 5 days. If today's much anticipated jobs number is indeed bad, that may cause a wave of selling that might set this market up for a temporary bounce. My job is to anticipate but not get in front of that move until it confirms itself. In that case, I might be tempted to take Google calls for a short ride, as it found support definitively at 50 day moving average. I also might be tempted to take a stake in Apple calls ahead of Mac World.

Be careful out there! We are in a bear market.