Late Rally Takes Market Off Lows

Although they finished Thursday’s trading session with modest gains, the major indices were able to recover from heavy losses earlier in the day, making many wonder if the much awaited oversold rally had finally begun. The wires were once again full of dismal news early in the morning as we headed towards the opening bell, including word that Steve Jobs would be taking a medical leave of absence, reports that BAC (NYSE: BAC) would need more capital for their acquisition of Merrill Lynch (NYSE: MER), a revenue guidance reduction and lay-off announcement from MOT (NYSE: MOT), talk of possible job cuts at MSFT (NSDQ: MSFT), and a worse than expected reading on weekly jobless claims. It wasn’t all doom and gloom, however. While ugly, the Empire State Manufacturing index wasn’t as atrocious as expected and the Producer Price index didn’t fall as fast as anticipated, but probably the biggest thing to help the market avoid as bad a start as had been indicated by the index futures in overnight trading was JPM’s (NYSE: JPM) fourth quarter earnings report, which showed they made $0.09 per share versus expectations for a wash.

Still, even though the futures were able to improve ahead of that bell, stocks start off the session weak. A lot of folks have been looking for an oversold bounce to kick in after the dismal action that’s this market has seen for more than a week now, so perhaps the improvement leading up to the bell was an effort by traders to buy the bad news. If that was the case, however, then they were punished for their efforts, because for the first hour of the trading session, stocks went straight down, pushing the indices to their worst intraday levels since just after the market hit its lows in late November and the Dow just a wee bit below the 8000 level.

The action stabilized after that, with the market drifting off its lows for the next hour and falling right back down as we worked into the New York lunch hour. However, just as the afternoon was about to get under way, news broke that BAC would be getting $15 billion in additional TARP funds and that Hamas had offered a truce if Israel pulls out within a week. What likely started out as a quick bout of short covering quickly gained steam to the upside, as the oversold rally that so many have been looking for finally got under way.

Although the indices came off their highs in the final hour, they were able to escape what was looking to be another day of heavy losses. In the end, each gained an average of 0.59%, with the Nasdaq leading the charge higher with a gain of 1.49%.

Like we’ve been saying, the action to start off the new year has been tricky to say the least, but only most enthusiastically deluded bulls could have thought that the action was going to be all puppy dogs and roses once we hung a new calendar on the wall. The big question, of course, is if buyers will be able to engineer some follow-through. We’re still oversold, so it’s very possible, but the action in the financials continues to be worrisome. We’re not dealing with the same credit market seizure that we saw late last year, so that’s a positive, but the way the banks have been trading has many active market participants worried. Without their participation, this market is going to have a rough time.

We’ll see how things go, but regardless of what happens over the course of the next few weeks, we’re still a long ways from having a market that supports building longer-term positions.

Let’s go to the charts.

The Nasdaq popped higher during today's trade on an up tick in volume. Technically, the bulls put in a decent bounce today, but the index remains below its 50dma.

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The S&P 500 (INDEX: $SPX) inched lower during today's trade on increasing volume. The index remains in a downtrend, and is below its 50dma.

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The Russell 2000 (INDEX: $RUT) inched higher during today's trade, but remains below its 50dma. The price action improved today as the dip buyers came in, but much work is left to be done before this index is out of the woods.

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