Rev shark:
Looking Back at the Bounce, and Ahead to Jobs
7/8/05 8:25 AM ET
The brave man is not he who feels no fear,
For that were stupid and irrational;
But he, whose noble soul its fears subdues,
And bravely dares the danger nature shrinks from.
-- Joanna Baillie
The market stumbled only briefly yesterday in response to an ugly terrorist attack in London. We hit the lows at the open and moved steadily upward all day.
The question we need to contemplate is, "Why no fear?" Why didn't the market care about this event? Did it not have some negative financial impact on the world economies?
Maybe not; maybe this sort of attack galvanizes the resolve of the rest of the world to deal more effectively with it. Perhaps it takes a loss of this sort to push us to deal more effectively with the issue, and that is ultimately a positive for the market.
That is one theory, but it is probably simpler than that. The market has always recovered fairly quickly from terrorist attacks and fears. Even after 9/11, the market came back rather quickly. Market participants learn their lessons quickly, and the first thought of many yesterday was "buy the weakness." A quick market recovery was highly anticipated, and the masses made it a self-fulfilling prophecy. Was there anyone out there who did not expect some sort of bounce?
The crowd created a quick bounce, which turned into some fairly powerful upside momentum, which helped squeeze shorts and produced a strong finish. A positive day following a terrorist attack certainly wasn't logical, but buying the opening weakness sure was. And since so many people recognized that buying the open was the play, they created the conditions for a continuous move higher all day.
I underestimated how far this would go yesterday, but I continue to feel it will falter fairly fast and am prepared to hit the short side very hard at some point. However, we have the upcoming jobs report, and that is going to make things very tricky.
Expectations are for a very strong gain of around 200,000 jobs for June. Unemployment is predicted to hold at 5.1%, and hourly earnings are expected to be up 0.2%. Those are solid numbers, and if we hit them, that will signal that the economy is in pretty good shape, but is that a positive for the market?
The biggest problem with a strong economy is that it keeps the Fed in play. A strong economy keeps inflation fears intact, and that means the Fed is going to keep raising interest rates to fight it. However, in the past, the market has reacted favorably to strong economic numbers, despite the fact that they may be inflationary, which makes it very difficult to predict the reaction.
I'm not sure if the market is going to embrace good numbers as a positive because the economy is strong or worry about them because of the inflation issue. We will find out in a few minutes. I'm still inclined to short strength and will be looking for entry points.
Gary B. Smith:
