News Whipsaw: Sharp Rallies/Plunges

George Brooks  |

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Big volume Friday was more a result of the quadruple future’s  expire, not a selling climax that turns a down market. Today’s weak open may be under the influence of those expires, as well.
   Just a hint that the Fed may back away from its stimulus policy in the near-to intermediate future roiled stock and bond prices last week.  To make matters worse, China is experiencing a credit crunch and weaker that projected manufacturing numbers.
   The Street knew the Fed would eventually have to back away from its bond-buying, low interest rate policy, it didn’t know when.
  It still doesn’t !
  That’s a problem.
   The “news whipsaw” I have warned about here will continue as the market will rise on speculation a withdrawal by the Fed is not imminent; and will decline on speculation a withdrawal  may start before year-end.
   This can be hazardous for impatient investors trying to enter the market at a price that’s not lower at the end of the day.
   The human tendency is to stay on the sidelines on down days, expecting prices to go lower, but rushing in after one of those brief sharp rally days, only to see the market reverse to the downside.
   Sellers tend to stay on the sidelines on rally days, expecting the market to go higher, but rush to sell when the market turns down sharply.
   The Street is faced with an increasing number of uncertainties.  The obvious one is Fed tapering. Closely related to that is the fear that interest rates will rise more than anyone anticipated with dire consequences for governments, business and individuals.  Running third is the exit of Fed Chair Bernanke. Then comes China, the world’s second largest economy with its credit crunch and sagging economy.
   The stock market, still up 12% this year, up 21% from the November 2012 lows, and up 139% from the March 6, 2009 bear market lows is vulnerable to a sizable correction, even though it has plowed through countless number of negatives along the way.
   Look for a series of spikes down, followed by sharp spikes up, as institutions jump in briefly to take advantage of lower prices.
   The uncertainties overhanging the market won’t be easy to dispel quickly, so a sustainable turn back up is not likely to happen for months, unless the market plunges down to DJIA 14,195 (S&P 500: 1,543) or so in a matter of weeks.
  Instead, look for a jagged, saw-toothed slide until August/September.
  This a big week for reports on the economy (see below).
Odds favor a drop of 95 to 105 points in the DJIA at the open and a rally attempt which  should hit resistance between DJIA 14,850 and 14,900. (S&P 500: 1,603).
I expect institutional forays into the market especially after big down days.
   I do not expect the uncertainty about the negatives noted above to vanish any time soon.

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