A Dead Cat Bounce in the Markets?

Includes: DIA, QQQ, SPY
by: Michael Kudrna

Thursday was another rough day in the markets as we continued the sell off. The bulls managed a bounce but we could not break the resistance at the 50-day simple moving average of 1087.

The good news is we tested the 1087 resistance five times today but, we were unable to break it. The more we can test the resistance, the more likely we are to break it. The sentiment is different though and the bulls are very timid now. The market environment is not stable at this moment. Everywhere we look, we have bad macroeconomic news. Doug Kass is still stating that we are going to have a revision in 2nd Quarter GDP from 2.4% to possibly under 1% now. That will prove to be significant weakness in our attempt at an economic recovery.

China isn’t helping the situation at all either. The slowdown in China was rumored at the beginning of the year and now the reports are indicating it surely is happening. Is this the end of the world? Absolutely not but, we can expect to see more bearish news during this historically slow season in the markets. Can the markets bounce back from all the negative news?

The uglier the news becomes, the more likely we are to have another stimulus. I’m not yet a believer we will create an actual stimulus that will truly help the economy but the markets will surely rally on it, possibly similar to the stimulus rally of 2009. The reality is we need to start working with companies to see what we can do to help them feel comfortable hiring. As I’ve stated before, tax incentives for hiring additional full-time employees every year is a step in the right direction. As is, we can outsource to another country for cheap labor and/or use machines that surely don’t require healthcare. Outsourcing doesn’t require healthcare expenses either. Quality companies are obviously shrewd and will find ways to reduce labor costs for their shareholders to benefit from. The problem is their shrewd tactics only hurt the economy further as unemployment remains high and many individuals continue to give up looking for jobs (and then are no longer counted in the unemployment rate upon giving up, so don’t be fooled by the unemployment rate touted by the media…it should be higher).

These concerns have obviously made the bulls timid and the bears more confident. The market has rolled over and I saw nothing today to indicate this was anything more than a dead cat bounce. Technically speaking, we needed to break resistance at 1087 today. Our failed attempts and lack of enthusiasm by the bulls have not given confidence to do any significant buying. I’ve reduced all my current positions into the bounce today and initiated a few tracking positions in Cisco (NASDAQ:CSCO), Ikanos Communications (NASDAQ:IKAN), and GoIP Global. Outside of that, I’m mainly sitting in cash and waiting to deploy it.

I’m enticed to build a position in gold but I should have done that a few days ago. With September being a historically strong month for gold, I may still be able to build a strong position at favorable prices.

NVIDIA Corp (NASDAQ:NVDA) reported earnings after the close and as expected, they were terrible. For the second quarter, NVDA posted non-GAAP earnings per share of $0.03 on revenue of $811 million. This was well below estimates. NVDA has been creating new 52-week lows lately so I was hopeful that the bad news was already priced in due to the early announcement that earnings would disappoint. Immediately after reporting earnings, NVDA rallied about 8% before losing it all and settling back to even. I’m still looking to build my position in NVDA over time as they have a serious amount of cash to work with but will be patient in doing so.

Fridays have typically been negative days to begin with and Monday we tend to gap-up but, with the new sentiment at hand, the trend could change quickly. With plenty of economic news, retail sales, and consumer price index, we should have a highly volatile morning that will likely become very boring during the afternoon. Any positive economic surprises should be met with some strong bullish behavior as expectations are already negative.

Disclosure: Long CSCO, IKAN, GOIG, and NVDA but positions may change at any time

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