Fear Works Both Ways

Wow

That was interesting. This market continues to amaze me. The DOW took a moonshot on a day when consumer confidence hit an all time low:

"WASHINGTON (MarketWatch) -- Wounded by the financial crisis, U.S. consumer confidence plunged in October, reaching an all-time low, the Conference Board reported Tuesday.

The October consumer confidence index fell to 38 from an upwardly revised September reading of 61.4. Economists surveyed by MarketWatch had expected an October reading of 52.

Expectations turned "significantly more pessimistic," with the percentage of consumers expecting business conditions to worsen over the next six months rising to 36.6% from 21%, and those expecting fewer jobs rising to 41.5% from 26.9%."

My Take:

Today was another historic day on Wall St. One thing you need to keep in mind after seeing days like today. When you have this much panic in the markets, stocks can move violently in either direction. Fear works both ways. Investors can panic about missing the next big move higher just as much as they can worry about losing everything when the market begins to crash.

We had some obvious short covering towards the close as the pain threshold for the shorts became intolerable once we got towards the highs of the day. This exacerbated the move higher.

We have seen this move before:

Anyone remember the parabolic move below on October 13th?:




Final Take:

I think its worth noting how this bounce turned out. If you were a bull and bought at the top on the 13th, you are probably wondering where your next meal is coming from. As you can see there was an immediate reversal the following day followed by further violent selling the following week.

Now I am not predicting we will see the same pattern this time, specially with an imminent announcement of more fed rate cuts.

Now this Fed announcement sets up an interesting inflection point tomorrow. Most think a .50 cut is baked in the cake. If they go .75 does the market cheer the news and rally or do they sell in a panic thinking the economy is worse off than anyone expected? If we get the expected .50 cut, does the market sell the news? If we get only a 1/4 point cut, does the market tank because they were expecting .50?

Its going to be very interesting to see what happens. I am not going to get in front of this announcement with any new trades. I will hold what I have and adjust accordingly until after we hear from the Fed.

Bottom Line:

Lets see what kinda follow through we see on the rally today. Keep in mind only 1.4 billion shares were traded on the floor. This is light for such a big move which means you should probably take it with a grain of salt. Panic moves are never a sign of health for the market. We are still in a pretty tight trading range.

You gotta trade small in this kind of trading environment because the whipsaws can rip you apart. There really is no strong confirmation for the bulls or the bears at these levels. The news continues to be daunting, but the government intervention to prop up the markets is just as strong.

This leaves the bulls and the bears both in the dark. Its time to settle down and see what the Fed says tomorrow. Lets also see what happens in the credit markets over the next few days in response to the TARP and the commercial credit support from the Fed that began this week.

When this rally burns itself out which could be as early as late tomorrow, its going to set up a nice entry point to short. The news out there is too horrific for any of the bulls to hold long. This is a traders market. Many stocks had 50% moves today. I see very little reason why traders wouldn't take profits here.

Be careful out there folks! Keep any positons small and hedge yourself. The market is about as mentally stable as Cybil right now.