Friday, July 9, 2010

Does Team Obama Really Want A Second Term? Maybe They Do....

After two weeks of straight down action, market players, who had been expecting an oversold bounce, were extremely frustrated. This week, the market not only delivered their oversold bounce, but it turned out to be the best week of the year for the indices, with a gain of over 5%.

The biggest bounces tend to occur within downtrends and bear markets, because market players are not positioned for them and have to scramble to add long exposure. In addition, the shorts, who have grown complacent after some good gains, add fuel to the upside as they rush to lock in gains and/or are squeezed. Both those factors were at work the last three days of the week as we jumped straight up.

The first thing the bears are going to say about this action is, "look at that pitiful volume". If there were some real accumulation taking place by major institutional buyers, we should have seen a jump in volume rather than a steady decline all week as we moved higher.

The second thing the bears are going to point to is that there is a tremendous amount of technical overhead to deal with as we move toward 1100 on the S&P 500. That mattered in May and June, and it is going to matter again in July.

The bulls are going to counter by pointing out how irrelevant overhead was last year, as we had a series of V-shaped moves back to the highs. However, it has definitely been quite different after the breakdown this market has suffered since the end of April. Is it possible that the bulls could pull off another V-ish move through that 1100 level?

What really adds some complexity to the situation is the start of earnings season next week. INTC, on Tuesday night, is the first big report on my radar, but it is followed by JPM, GOOG, BAC, GE and C later in the week.

The way earnings are perceived is going to determine the direction of the market. The big bounce this week probably increases expectations a bit and gives us greater risk of some "sell-the-news" reaction, but it is the forward guidance that is going to be the focus. If we start hearing about slowdowns in Europe, or concerns about a dip in the economic recovery, we could roll over quickly. The good news is that for the most part, earnings have been quite good over the past year, despite this horrible economy. Many market players expect that to continue, and if they are right, there is a good chance we can keep on climbing higher.

As for the administration, there is no coincidence. A change at the White House, a change that says, look we are not creating jobs, we are not getting this economy moving, we must be doing something wrong, did mean something. Losing people like Jeff Immelt and Ivan Seidenberg from the ranks of people who are cooperative with the president means something.

They don't want to lose - they want the second term. Obviously they want the Congress to stay Democratic; and they aren't suicidal. For awhile, I thought for sure they were.

So did other market participants.

Think about what's been happening here. We have taken Europe off the table for now. We have taken China off the table -- soft landing. We have stabilized the key Spanish banks. We have gotten to the point where it is reasonable to believe that BP will have things under control and that the great job-creating cleanup will begin while there is no ban on offshore drilling.

And now we have the White House starting to look at the stock market and realizing that it matters -- the Kudlow interview of Geithner -- and starting to talk about how capital, not just labor, matters.

These are all good things. Now, of course, the ideologues will say that housing is still bad and credit is bad -- I am not even sure of that one anymore -- and no jobs are being created. But if I am right that the anti-business agenda is on hold, then companies will be rational. They will hire.

Next week, earnings begin. Given the euro stabilization and given the Chinese soft landing, I have no reason to believe that the earnings or the conference calls will be necessarily downbeat.

Unfortunately, all things always begin with the crappy AA. This company's estimates are like the housing estimates. They are perennially too high. The ridiculous analysts are looking for 11 cents.

Take is from me: Anything better than a loss is better than expected.

The moment is positive. Those who are staying as negative as they were are simply out of synch with the moment.

They will have to defend themselves, for the first time in two months. The bulls, at last, can have something to stampede to......

long C

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