What's behind the bounce

Why did investors get a sudden burst of optimism Wednesday?

By Jim J. Jubak Jun 6, 2012 6:20PM
So far this is a bounce on speculation that somebody is going to do something. That wouldn't be enough to move global stock markets except that after Friday's plunge they were as oversold as they've been since last November. 

How high markets will bounce depends on whether or not we start to see something more concrete than speculation as the June 17 Greek election approaches.

Here's a brief rundown of Wednesday's speculation:

Optimism that the European Central Bank's decision Wednesday not to cut interest rates makes an interest rate cut in July more likely. The logic here is that the vote Wednesday showed a sizeable minority of the bank's board in favor of a reduction in rates now. And that shows that the momentum has shifted toward an actual cut to 0.75% from 1% in July.

European Central Bank President Mario Draghi’s post-meeting press conference was so negative -- increased downside risk, more uncertainty, flat GDP, a lack of any economic momentum -- that it is being seen as a set up for a rate cut in July.

Key allies of German Chancellor Angela Merkel are signaling that they would be open to a debt-sharing deal to save the euro under the right rules. The fact that the discussion is now about the exact nature of those rules has convinced some investors that Merkel will agree to a deal at the summit of European leaders on June 28-29. 

The plan might be modeled on plans for a European Redemption Fund that would be backed by the $2.9 trillion in gold held by eurozone members. Countries would be able to transfer sovereign debt above 60% of GDP to the fund and the fund would be "joint and severally liable" for the debt. That might be acceptable to the German government, a Merkel spokesperson has said, if "joint and several liability" were changed to "several liability," which would limit the potential liability of individual eurozone members. I think here the logic behind the market's optimism is that if eurozone leaders are talking about this degree of detail, it raises the odds of a deal.

Comments by Federal Reserve Bank of Atlanta President Dennis Lockhart after a speech in Florida Wednesday that extending Operation Twist "is an option" are being seen by some traders as a set up for Congressional testimony by Federal Reserve Chairman Ben Bernanke Thursday in which he might indicate that the Fed will move soon on a new round of quantitative easing. I think that’s a lot to read into remarks that weren’t significantly different from what Lockhart has said in the past, but Wall Street wants to believe. The Federal Reserve's Open Market Committee meets on June 19-20.

I think the best way to think of Wednesday’s bounce is in the context of the kind of event risk calendar that I sketched out in my June 4 post.

After the big sell off in May, and with a very full schedule of events in June that might bring good news, short-sellers and bears would think about taking profits on the slightest provocation, I argued. I think speculation like Wednesday’s amounts to "slightest provocation."

The more the markets bounce, of course, the more that full calendar of events starts to become a list of reasons for investors who have made profits on the bounce to sell. The big unknown for anyone long stocks is, of course, the Greek election on June 17 where a victory by the Syriza coalition could lead to a rapid exit by Greece from the euro. Syriza leader Alexis Tsipras said on Friday that he would rip up the austerity deal with the European Central Bank and International Monetary Fund, and restore cuts to the minimum wage, unemployment benefits, and pensions. 

Wednesday ahead of a meeting with leaders from the G20 countries, Syriza has been taking a more moderate position with Yiannis Dragazakis, the member of parliament credited with drawing up Syriza’s economic program, saying that the coalition’s economic program was "flexible" and would take into account "daily reality."

I think that the Greek election on June 17 carries enough event risk that in the short-term it is likely to act as a limit to any bounce.

What happens after that date -- bounce or a return to the correction -- depends on the result of the Greek vote and the eurozone's reaction to that vote. (And don’t forget the June 11 International Monetary Fund audit of Spanish banks and the end of June report on the financial condition of Spanish banks from the independent auditors brought in by the Spanish government. Or that the Greek government looks like it will run out of money in July.)

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of any stock mentioned in this post as of the end of March. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
28Comments
Jun 6, 2012 10:41PM
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the only way to make buying stocks worthwhile again would be to pass law where when you buy shares of any kind you have to hold them for at least a week or more so that day trading and flipping stocks every few seconds with computer programs would end.  Its only legal to "play" the market with such poor ethics because of big lobbyists and crooks buying out congress.  Our money now world wide is about as valuable as toy monoply money.  I guess thats why people who have billions still think they dont have enough.
Jun 6, 2012 8:37PM
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the big boys pumped the market up today and will sell off tomorrow-a never ending ploy used by professional traders-good news or bad - any rumor is an excuse to pump and dump.......
Jun 6, 2012 7:07PM
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Inestors never got happy. They are trying everything to get back to even or get there portfolio's in better shape to pull the hell out of this freaking game they call investment. Wall Street in the rear view mirror is the game right now!!
Jun 6, 2012 9:29PM
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They always tell small scale investors and 401k account holders to "stand pat". Meanwhile, the fabulously wealthy play with investments in a manner not unlike day trading.
Jun 7, 2012 12:07AM
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P.T. Barnum said it best, "a sucker is born every minute."  I am neither a Libtard, Demonut or whatever.  This is business not politics.  All I ask is for a FAIR return on my investments.  As it stands now the Market is being manipulated and what happened today was to "reel in the suckers." 

 

When the market went down the tubes in '08-'09 I lost enough that I could have purchased 2 Ferraris and paid cash with spare money left over.  Hell the market fell over 1000 points in less than 30 minutes.  But because there was less than 1 hour left in the trading day, trading was not suspended.  A computer problem was blamed, yeah right! 

 

But my buddy Warren has helped out by saying that he pays fewer taxes than his poor secretary and all should pay more.  We also have Barney watching everything with banking and finance.  Give me a break! 

 

I am to the point that I may pull everything out of the market and bury in mason jars.  Will be safer and definitely more protected!    

Jun 6, 2012 8:44PM
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I have a feeling the Walker Victory in Wis. had something to do with it. If Obama goes the Market will really take off.
Jun 7, 2012 6:00AM
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When professional investment houses relocate their trading computers a couple of blocks closer so that their trades occur nanoseconds faster you can gauge how stacked the deck is against small investors and what your odds are of playing on a "level" field.
Jun 6, 2012 11:21PM
Jun 6, 2012 9:17PM
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A ball usually does bounce...up and down, up and down. They also deflate and go flat. As I am sure will happen tomorrow.
Jun 6, 2012 10:32PM
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Balls bounce.  So do dead cats.  If you don't have a PCRA 401k, you are screwed.  If you don't have a 401k with a stable value fund (like Boeing), you are screwed.

 

My favorite play for the bounces?  I hold four long positions in my portfolio.  I've marked on the calendar their div dates.  When the div comes, if they are above their per-share price I paid, I take them off of dividend reinvest.  If they are below their per-share price I paid, I leave them on dividend reinvest.

 

Even a blind pig can do that, even if they are not wearing lipstick.

 

But, yes, the big question still remains.  Every day.  Who are you long on?

 

I recommend Smith & Wesson, B a$$ Pro Shops, and Cabellas.

 

(I had to write Ba$$ that way because the dirty word computer software deleted it.  I'm okay with that.  I don't want to post dirty words.)

 

Jun 6, 2012 10:15PM
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When markets hit the near term bottom they bounce.
Jun 6, 2012 10:33PM
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Uh, Jimmy, did you forget that Wednesday (today) is the day after the Wisconsin election beat down of unions and liberal democrats? Americans became optimistic that Obummer will be gone in January 2013 and that normal Americans are once again paying attention to the people who drove us over this cliff for the past 50 years.

Jun 7, 2012 6:52AM
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Another day. More fiat dollars where they don't belong. A curious absence of relevant news this morning. In several locations you can read Wall Street's misinterpretation of Fed indications that more QE is ahead. The reverse is historic... proclaiming some life in this dead economy and recalling some of the fiat dollars in an attempt to bolster the rest. Collapse generally follows.

 

One poster here suggested a 7-day sitting period on stock purchases. I also think that's a very good idea. Hike the Bank Rate to 20% again (1980-81) and we filter the credit purchases out of the mix. A tax on trades? A single national tax on all purchases (including financial transactions) would help out quite a bit. Notably there still hasn't been any focus on revenue consistency. Also noteworthy is the Silence of the Congress. We're relocating our fleets toward China, seeing new unrest in the Middle East and significant unrest on Main Street. At some point, those who proclaimed that the welfare of the nation shouldn't rest in the hands of the people, need to leave and let adults handle the mess they've made and havoc caused in result. Time for change, but not falling off the cliff.

Jun 7, 2012 9:41AM
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With a volume of 140 million shares in the DOW traded on Wednesday, it is a stretch to say that INVESTORS are back.  A relatively few shares can greatly move the market cap of a company and by the same token the market. 
Volatility is one thing, but not great when driven by a small percent of the players, because that tide effects all boats' levels.

TODAY : 120 point in the DOW on 17 million shares
Jun 7, 2012 8:19AM
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Don't discount the political winds.

 

1) The upcoming Supreme Court decision on Obamacare. This week there were numerous democrats commenting on what they'll do "if" the individual mandate were to be ruled unconstitutional (which means they have been tipped off that the Supreme Court will rule it is unconstitutional). Investors are plugging into their investment calculators the effect of lifting that burden from business.

 

2. Scott Walker's win and the upcoming November elections. The possibility of getting rid of Obama and his administration's assault on businesses cannot be understated.

Jun 6, 2012 10:39PM
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Hey, what just happened there was pretty cool.  I won't explain,  but I have a lot of respect for the umpires at MSN.  I guess they must be working 24/7.  That's awful.  Can't they go home and play catch with their kids or something?

 

What happened to the Emotioncons?

Jun 8, 2012 4:34PM
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After years of studying the U.S. equity markets, winning on some and losing on others, it has been made clear by good old Ben when in doubt PRINT MONEY!

Jun 7, 2012 1:15PM
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Blah, blah, balh. Stocks got cheap?
Jun 6, 2012 9:44PM
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Randall I do understand what you are saying, and the market is not for people who can not afford to lose, in the same way the people who can play to stay in the game does , only the very self controlled low income people can possibly make money, If they learn to be patient, and not go to fast, and not take to much risk, until they can do that comfortably with money they set aside to do that with, If you can wait for a stock like BAC, AA , or another staple stock that is at a low price, and buy shares to hold say a thousand shares of bac, at six dollars, or the price its at now, and hold it for a few months or a year, you could make a couple of thousand dollars ! with these low priced stocks, the more you buy the more you can make, if you hold them and be patient, like saving for a kids college fund, buying six or seven thousand shares when they are down, and holding them for ten years, , and selling to lock in profits, when they are up, then buying back in when they are low, you could make anywhere from fifty thousand dollars or a hundred thousand dollars, over time or just in time for a young adult to go to college, don't get greedy thats the number one rule, start small and work your way up!!!
Jun 6, 2012 9:20PM
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R. A. 88; If you are saying that Walkers staying in office indicates a Republicans win in NOV. lets hope that does not happen the wealthy have enough allready, If the Tea  Pubs get back in the middle class will  be the losers if that happens, I do not think that was an indication of a Republican win in NOV. that was more like many Dems agreeing with the public Unions  being trimmed back to the private sectors more, where the tax payer is not footing the bill , but make no mistake Walker did not do what he did for the general welfare of the average person, this was a power move to keep the unions from being a factor in the elections in NOV. they would really want to break all unions, private and public, its a cheap labor thing that is going on now, with the unions holding back a full scale cheap labor market in the country,   the gas prices coupled with optimism, and an economy that is on the way up , along with the more positive talks about Greece, it seems to me like there is some positive things being talked about that the money people know that others do not know may be in play here, along with the possibilities, that the interest rate may be cut some, and the feds could be buying another round for the house;  could be in play thats about all the trickle down the middle class will get if the Tea Pubs get the white house in NOV. 
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