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Doing What’s Right

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The market should go up this week.

That's what the charts say. That's what the explosively higher volume on certain ETFs say. That's what most market observers, bull and bear alike, say. Even some of the most wild-eyed armageddon-prepped bears that I read concede that it's time for a bounce.

That's precisely what worries me. Any time most people agree on what should happen next, just the opposite occurs. There's nothing that gives the market more jollies than proving as many people wrong as possible.

All the same, it would be pretty easy to conjure up some things lining up to create a substantial, multi-week push higher, such as:

  • FNM and FRE calm down (or get wiped out, IMB-style, by a government receivorship, thus getting them out of the way as a topic altogether)
  • The earnings which begin tumbling in this week are judged as Not So Bad (GE-style)
  • The sectors that have suffered the worst drubbings (like investment banks) make a particularly large bounce-back, generating "things are cheap!" feelings in other sectors

One other possibility (but certainly not the only other one) would be for a single, one-day shakeout that pushes the $VIX way up into the mid- or high-30s, thus dispensing with the excuse that everyone keeps trotting out for this not being a bottom – – – fear hasn't been high enough.

I've had surprisingly little time this weekend to look at charts, so I decided (here, at 3:30 a.m. on Sunday!) it would be better to put together a short post rather than just having nothing out there. So here goes.

The "one missing piece", as I said, that everyone keeps seeking is a really high $VIX. We are at nearly double the levels seen in mid-May, but people want (to borrow a title from an early 1990s drama) Thirty-Something on the VIX. Paradoxically, people want to see rampant nervousness so that they can rest easy.

I mentioned recently that I think the Dow is going to make a pretty major bounce at somewhere near the 10,700 area. We are awfully close. Friday put us into the 10,xxx camp, and the huge intraday rally (taking the Dow from -230 to positive territory in less than an hour) indicates to me the pent-up bullishness lurking under the sheets.

I don't show volume in many of my charts, but this was knocked me over for its statistical weirdness. I noticed that for every day last week, particularly the final four days, the volume on the IWM was almost identical. Not just sort of close. But borderline exact. Tuesday, Wednesday, Thursday, and Friday all had volume of 131 million and change. It's just weird. It's like walking into a class of students and finding out that half of the boys are named Fred. I don't draw any conclusions from this except for the fact that there is a lot of high-volume churn going on in the market as a base attempts to get hammered out.

Oh, and then there's the big post-close news of the week: the shuttering of Indymac Bancorp. Just look at this chart – – from the mid 40s to $0. Obviously the elimination of a stock whose market cap was only about $25 million is inconsequential in the numeric scheme of things, but the psychological effects of the third largest bank closing in the U.S. will be seen on Monday.

If the markets do bounce, I think the Russell will bounce the strongest. That's where I intend to stake out my trades, should strength take place.

Virtually all my short positions are in energy-land, and in fact I did buy five different call positions on Friday. There are still a handful of interesting charts on the short side, even with the market at these levels. PG is one of them.

I mentioned the strong ETF volume. Look at UWM, and how strong the volume was at the mid-January and mid-March lows. We can see a similar surge in volume here.

Even moreso, look at SSO, whose volume was a new record!

I guess I'm most bearish on energy, which is why I've got a ton of DUG. I am delighted at the price behavior above its former resistance trendline.

And so I'm going to leave it at that. The upcoming week is going to be a barnburner. We've got a slew of major economic reports. Testimony in front of Congress by Bernanke. Earnings from a ton of companies, including a little outfit named Google. And all this with a backdrop of a market battered to pieces over the past 2 months and FRE/FNM on top of it. Hold on to your hats!