How to Trade this Market

Stocks rallied put together a very impressive rally out of the hole on Tuesday. After being down over 200 points in the early going, the Dow Industrials rallied in the final hour to close 250 points to the upside.

How many times have stocks been down +1% at 3 pm only to rally and finish in the green? Bespoke Investment Group tells us that since 1985, that type of powerful reversal gas occurred only 10 times. And 8 of them have come since October of 2008.

Interesting times, indeed.

There are likely many reasons for these types of powerful one-way moves. And I’m sure the prevalence of computer-based trading is a major culprit. It seems to me that much of Wall Street now trades in one direction. Everyone is either bearish or bullish at the same time. And that leads to strong moves, but also may create more churning up and down.

In any event, I think we can also conclude that short-covering was a major reason for the strength of the reversal. Stocks were extremely oversold, and valuations were quite compelling. It is for this reason that I told you Monday that a rally was imminent. But now that we’ve seen some upside, let’s not get carried away.

Jason Cimpl, at TradeMaster Daily Stock Alerts, recommended a slew of upside trades on Tuesday. By the time the market closed, his readers were sitting on 7% 8%, and 9% gains.

I’ve said it before, but no one is better at trading this market than Jason Cimpl. If you want to profiting right away, check him out HERE.

I still believe there is little reason to wade into this market with any conviction until after Greece defaults (of course, I have no problem with short-term profiteering). With any luck, that will happen before Greece actually runs out of money in mid-November. Too bad the EU still doesn’t seem to have any sense of urgency. At the very least, the EU needs to throw cash into Euro-banks and fortify those balance sheets. News of this will send stocks higher.

But when you read statements like this… (quoted from Bloomberg):

[German Chancellor Angela Merkel] said that she supports recapitalizing European banks "if there is a joint assessment that the banks aren’t adequately capitalized" and finance officials develop "uniform criteria." Germany is ready to discuss possible bank aid at this month’s EU summit, she said.

…you are reminded just how dysfunctional the EU is. I mean, the market has clearly stated that Euro-banks are undercapitalized. And Merkel is still suggesting that the EU needs to come with a system for deciding what the market already knows.

U.S. bank stocks have been absolutely creamed over the last couple of months, and prices are so low, they now look attractive. Still, I have reservations. The banks are exposed to Euro-bank debt. Morgan Stanley (NYSE:MS) is the poster-child for this exposure, holding up to $39 billion in exposure to Euro-bank debt.

Of course, Morgan Stanley’s exposure is hedged, but how comforting is that? After all, banks were hedged before the housing bubble burst too, but one of the main underwriters of that risk, AIG (NYSE:AIG), couldn’t pay. And perhaps the very worst aspect of the bailouts was the cash that went in AIG’s front door and right out the back to companies like Goldman Sachs (NYSE:GS).

But the Greek-default as well as Euro-bank situation is just one that’s weighing on the U.S. banks. There’s also the continued weakness in the U.S. and Operation Twist. The weak economy impairs banks earnings power. And so does Operation Twist, which is pushing long-term yields lower.

That’s why earnings estimates for banks have been cut so sharply in recent weeks.

This situation has led to sharp declines for banks, even those that don’t have much Euro-bank exposure, like JP Morgan (NYSE:JPM).

As much as I might like to, I still can’t get bullish on this group.

Oil and tech stocks, however, are a different story. These groups have made strong moves off of recent lows.

With the passing of Steve Jobs yesterday, the world lost one of the most influential entrepreneurs of our time.  Steve’s creativity allowed him to be a visionary in the world where technology met consumer goods. His uncanny ability to anticipate the future and create revolutionary products that most people couldn’t even imagine separated him from everyone else.  Steve often said that you should live every day as though it was your last.  He certainly lived his life this way, and showed us just how much a single individual is capable of accomplishing.

Steve has left a lasting mark on the world today, and we’ll all benefit from his many contributions to in the coming decades. My thoughts go out to Steve’s family, friends and colleagues during this time of grieving.

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