In a Beaten Down Market, Bad News Is Blown Off

Stock Market Blows Off Bad News

The unemployment numbers were the worst in 35 years. Horrible news, right? Clearly, the economy is a shambles, right? What is the market’s reaction? Why, a rally ensues, of course.

Conventional wisdom is that bad news will cause a market decline. However, when the market is so beaten down, bad news fails to have the same effect. The stock market is a forward looking animal. It does not live in the now, it focuses on the future. Based on Friday’s action, the notion of a bottom forming is more plausible.

Over the past two days, the market has shown renewed strength. After dipping down on Thursday, the market has rallied. Both the DJIA and S&P 500 have moved up on increasing volume. This is in stark contrast to the decline at the beginning of January, when losses occurred on lower volume. Apparently, the smart money is buying at these levels.

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The DJIA is still the laggard index. It faces resistance in the 8400 area as well as at its 50 dma. The S&P 500 has shown more strength. While it breached the 850 area, it still faces resistance at around 870. It will also be retesting its 50 dma for the fourth time in less than two months. Maybe the fourth time is a charm.

As for investor sentiment, while there have been upward spikes on the VIX, it is still in a downtrend. Little by little, excessive fear is leaving the market. Reduced trader anxiety points to more favorable trading conditions for the bulls.

One thing still missing is market leadership. While education and biotechnology stocks have been the better performers recently, no group has taken the lead. Moreover, education stocks are not necessarily the kind of leaders you want if a rally develops; this type of stock is bought on the belief that the unemployed will return to school to hone their skills as opposed to finding jobs.

Right now, the market is trading sideways. While a bull market may ultimately develop, no one can ever be certain. Unless one is day trading, the best thing to do is sit out the storm. Let the market show its strength; there will be plenty of time to make a profit.

Disclosure: no positions

Comments

[herbert hoover:]

"Conventional wisdom is that bad news will cause a market decline. However, when the market is so beaten down, bad news fails to have the same effect. The stock market is a forward looking animal. It does not live in the now, it focuses on the future. Based on Friday’s action, the notion of a bottom forming is more plausible."

I knew we couldn't go a whole week without someone calling a bottom. There's a bottom allright - at 6500 on the Dow. It's way too early

Feb 09 01:48 PM

[Richard Glenn:]

Is this the final bottom? The buy hold and forget bottom? Perhaps not, but for the last couple of months the market has refused to follow through to the downside, and it's worth pointing out that many of the best stock market rallies happen during bear markets. For the nimble, there is a lot of money to be made. At the very least you may want to hold off on placing your short bets just now, until Mr. Market leans over and whispers "I don't feel so well. . . "

Feb 09 03:10 PM

[ROLEX18:]

While you sit, others make a profit.

Feb 09 03:30 PM