By David Moenning
Chief Investment Strategist
After one of the most dismal starts to almost any month on record, the market has certainly perked up a bit since the 18th of May. Although the same can't be said for Facebook (FB) or RIMM, the S&P 500 has been higher five of the last six sessions and has tacked on nearly 3% in the process. The 'little bounce that could' has helped to limit some of May's market misery as the S&P is now down just 4.68% on the month.
While that hardly seems like good news, let's keep in mind that our furry friends in the bear camp have pretty much had their way with stock prices until six days ago. The bears had "Grexit" on their side, as well as China data, Europe's economy and debt crisis, a crashing euro, diving commodities, and the idea that this year's BTE theme in the U.S. was really just a matter of good weather coming a little earlier than normal. In short, the bears had just about everything going their way.
However, we need to recognize that after a -7.8% dive to start things off on the wrong foot in May, the glass-is-at-least-half-empty crowd hasn't been able to do much with their recent opportunities. Each and every day there is bad news out of Europe as well as points east and west. For example, today we learned that Spain's Bankia is basically bankrupt and that the government's plan to use smoke and mirrors to bail them out isn't going to fly with the ECB. We learned that China's economic growth rate is likely to continue fall. We also learned that the Consumer Confidence in the U.S. is heading in the wrong direction and that housing prices aren't getting any better. And how did the market respond to that? With a triple-digit gain, of course.
Thus, it is important to recognize that we're seeing pretty decent 'pin action' right now. In other words, the bears appear to have the ammunition but the gun seems to be jammed. There has been no scary retest of the lows or another breakdown. There has been less worry about what might happen if the left-wingers in Greece prevail. And it is definitely worth noting that this year's edition of the Greek tragedy has had a less severe impact on our markets than the prior two (in 2010 stocks fell -16% and in 2011 they dove -19.4%).
The bulls contend that the support has held, that the market is oversold, and that sentiment has gotten entirely too negative. Our heroes in horns also suggest that the U.S. remains the best house in the global investing neighborhood as far as risk is concerned and that as such, money will continue to flow into our markets. Thus, the chatter around the bull camp is that they have taken the bears' best shot and that the correction is now over.
However, before you run out and lever up that 'risk on' trade (UPRO, EEM, DBC, USO, JJC, JNK, and ONN) we need to remember that the current stock market environment remains rumor-driven. Keep in mind that while the early reports on Tuesday attributed the idea of more stimulative measures in China to the strength in European bourses and U.S. futures, it was really the rumor that the ECB was going to make an announcement about bank recapitalizations in Europe that really got things movin' on up in the U.S. Well that and the chant of "QE3! QE3! QE3!" that could be heard after each of the three disappointing economic reports here at home.
So, while the bulls can certainly take pride in their work over the past week or so, let's not lose sight of the fact that as long as traders continue to believe that another QE fix is a possibility, then all news can be considered good news. But if the rumors/headlines out of Europe take a turn for the worse, then the bulls might need some to time to regroup, rethink, and reassess.
For more on the State of the Market, visit http://www.stateofthemarkets.com