Wednesday, June 10, 2009

The Same Late-Day Buy Program Is Run Again

We probably shouldn't be surprised that the market bounced back very strongly once again in the final hour. We have done it so consistently that traders are going to help it happen. What is surprising is that it keeps working so well even though everyone is painfully aware of it. Typically, traders keep trying to jump in front of a regular pattern until they anticipate it to such a degree that it doesn't work.

I suspect that this pattern is working so consistently well because it is generated primarily by giant program trades that are more powerful in the short term than anything in the market. The program buying feeds on itself, squeezes shorts and entices the hot money back into the market.

So after a gap-and-failure up this morning and then another run-and-gun close this afternoon, the net effect was that the indices finished with mild losses and are still firmly mired in the recent trading range. Breadth was negative, and some of the small-cap momentum slowed, but there was still some speculative action to find in solar energy, oil shippers, auto parts and select China names, but it was a bit less frantic than in the last couple days.

Obviously the bears can't get their claws into this market, but the bulls aren't quite able to charge through overhead resistance either. The good news is that within this trading range action, there is some good trading to be found. Traders have enough confidence to not just quickly flip for small gains, and they are generating some follow-through in places; this creates opportunity even if the indices churn.

The bears are due to win this final hour battle one of these days but today wasn't it. We have to continue to respect the bulls, or maybe the respect should go to their computer programs that seem to be stuck on "buy."

Going into more detail, the major indices started the session with solid gains, but drifted into the red before gradually paring losses into the close... Part of this session's weakness came as concerns that rising oil prices and higher borrowing costs associated with rising Treasury yields could stymie an economic rebound... Oil prices eclipsed the prior session's 2009 closing high by finishing 1.7% higher at $71.14 per barrel. Crude prices also registered new intraday highs for 2009 by climbing to almost $71.80 per barrel shortly after weekly oil inventories showed a surprise draw... Treasuries fell under renewed selling pressure amid news that the Russian Central Bank will cut its Treasury holdings, and a $19 billion auction of 10-year Notes proved disappointing. In turn, the 10-year Note shed some 20 ticks this session, which pushed its yield up above 3.9%. That means the yield on the benchmark Note has increased by approximately 80 basis points in less than one month... The disappointing auction and rise in yields drove selling in the broader market, which left only the utilities sector (+1.6%) in the green. However, as the market pared its losses into the afternoon, materials (+0.1%), telecom (+0.2%), and energy (+0.7%) were able to climb back into the green and log gains... Financials saw the worst loss by declining 1.6%. Consumer discretionary stocks slid 1.0%, despite an upwardly revised earnings outlook from home improvement retailer HD... Investors continue to look for signs that economic growth is actually taking root and, in turn, were uninspired by comments from the Fed's Beige Book that signs of economic decline are slowing, while several districts indicated that their expectations have improved... News that the overall trade deficit widened to $29.2 billion in April from $28.5 billion in March also had little impact on trading. The latest number was in step with the consensus estimate, but reflected the ongoing economic difficulties around the globe. Moreover, the April figure was a bit above the first quarter average, so it will factor negatively into second quarter GDP forecasts....

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