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Has the Market Put in a Bottom?

Positive signs surfacing, but important piece of the puzzle still missing

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The financials, via the Financial Select Sector SPDR (NYSE: XLF) are still holding the lows of the long doji candle from June 10. Any bullish moves here should not be taken serious until we get a clear daily close above the highs from June 14. A break and daily close below the low of June 10 would indicate lower prices ahead. Individual banks such as JPMorgan Chase (NYSE: JPM) are, not surprisingly, showing similar price movements.

XLF Chart

Goldman Sachs (NYSE: GS), for example, has created a wedge-like pattern over recent weeks that, if broken in either direction, would be telling.

GS Chart

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The main correlation to watch remains the U.S. dollar. A rising dollar typically equals falling equity prices and vice versa. To get a feel for the importance of the movements in the dollar as it relates to stocks, see the chart below. It shows the price movements of the SPDR S&P 500 (NYSE: SPY) versus the PowerShares DB US Dollar Index Bullish Fund (NYSE: UUP). (The correlation is even more extreme if one were to look at an intraday chart of the SPX versus the EUR/USD).

SPY vs. UUP Chart

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Some positive signs are surfacing in terms of potential bottom building on select indices and stocks. Sentiment also seems to be moving toward extreme negative readings. The week before last, the CBOE put/call ratio had the biggest one-day rally since the end of 2008, and the AAII moved to the lowest levels since summer 2010. As we discussed in Friday’s Daily Market Outlook, the VIX has finally sparked higher, also something for the positive column.

The main piece remaining for a tradable bottom bounce is upside confirmation in the broader indices and high beta stocks. My preferred scenario, however, would be a one-day wash-out and sharp rally back up, followed by a good green follow-through day. On the back of that pattern I believe much better risk/reward trades to the long side will set up again.

For one stock that has more downside ahead of it, see the Trade of the Day.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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