Shocker! More Bad News . . .

Kevin Lane is one of the founding partners of Fusion Analytics, and is the firm’s director of Quantitative Research. Prior to joining Fusion Analytics, Mr. Lane enjoyed success as the Chief Market Strategist for several sell side institutional brokerage firms, where he made unique and savvy market predictions. In those capacities he oversaw the firms’ research departments and was the main architect for developing their proprietary stock selection models and trading algorithms. Mr. Lane produced a broad range of widely followed institutional research publications ranging from industry specific notes to quantitative/fundamental reports on individual stocks. His buy side clientele consisted of many of the nations top money managers and hedge fund managers. Mr. Lane is a member of the Market Technicians Association and earned a B.S. in Business Management from the State University of New York at Plattsburgh.

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I don’t like to be a Bull or a Bear. I like to be impartial, sort of like Switzerland and let the weight of the evidence direct me. If the evidence suggests that the market has a better chance to go up I will employ long strategies. Conversely if the evidence suggests the market will go down I will raise cash and employ short strategies. So I try not to pick a side but rather let the data and unbiased/unemotional evidence steer me in the potentially right direction. Sometime the evidence screams bullish, other times bearish and still other times (like presently) the tea leaves are mixed. In this scenario it is best as I said yesterday to make smaller commitments until the evidence is more convincing.

That said I believe the market is a discounting mechanism and the reason we dropped 46 % from the recent S&P 500 peak is because the market was anticipating the nasty headlines you see today and last week and probably over the next several months and boy when you read them it makes you not want to get out of bed today (lol !) However if it is in print then astute market players have long since factored in the news I believe. So as the horrendous headline news hits the tape each day watch it is important to watch how the market reacts. If it continues to drop and drop well then this news hitting the tape was not in fact discounted, however if we continue to rally on bad news then that would be a good sign.

Go ahead take a gander at today’s collection of headline news:

AP – New Jobless Claims Jump to 26-Year High

Reuters – Durable goods drop 1 percent in

AP – Oil falls towards $37, tracking global equity losses

AP – World markets slip after gloomy US economic data

Reuters – Toyota’s global sales mark worst in 8 yrs.

In summary it is hard to put any stock in days leading up to the holidays since volume tends to be light and the real decision makers at large institutions leave early but we will know soon enough as the New Year approaches if the bad news is already baked in. My best guess is the market knows all this bad news already it is more trying to handicap how good the current bailout and multiple stimulus packages will work. If we go lower then the market is saying its not enough. If we can rally then the market is saying we believe the globally concentrated effort to stave of this chasm is going to work.

Volume and internals will signal which way the market will go. Over the last 5 months there has been consistently more down volume than up volume, more decliners than advancers and more new lows than new highs (day after day after day). However of late the negative skew is dissipating so the idea now is to watch for the turn in internals the other way (i.e. a consistency of more up than down volume, more advancers than decliners and more new highs than new lows.) Technically the 50-day moving average stalled all the major indices recently (as well as the 9,000 level on the Dow). To get any sustained move up we need to break above these levels.

Of note one group is starting to show some consistent strength in this mess; Biotechs. Keep your eye on this group as they may emerge as a leadership area of the market when the tape turns. We will put together a list of good looking biotech names for next Monday.