No Capitulation So Be Careful With The Likely Bounce

The market is giving high odds for a rate cut with the Fed policy statement to be released at 2:15 p.m. today. The market's reaction to the cut is likely to make or break support levels, which the market closed near during yesterday's session.

The SPY has support at $126. The Bear Stearns debacle wasn't able to take down this area yesterday, but that certainly does not mean that the all clear signal has been sounded for the longs.

We seriously doubt that a major low has already been put in. Technicals are a mess and there is no good reason to step in and try to pick a bottom in this market. While a rate cut is likely, it remains to be seen how the market will respond to a cut. The dollar is getting killed and more rate cuts are just going to cause further damage to the currency that is already on life support. It's hard to imagine that a big rate cut will be embraced as a positive at this point.

It seems unlikely that support at $126 will get cut today, so what we want to watch out for is how the market behaves if the SPY returns to the $129-$131 area.

Sentiment has reached levels of extreme bearishness, and the VIX is finally spiking. Thus, it wouldn't be a huge surprise to see the market bounce today allowing fear levels to let off some steam.

A bounce is not a reason to get bullish though. Rather, a bounce here would likely be a chance to reload the short position. We have zero signs of capitulation; either near term or long term so it is our best guess that the SPY has a date with its extreme somewhere in the $122 area once a bounce relieves some of the near term oversold condition.

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Outlook:

The bounce failed when Bear Stearns collapsed Friday. We may be nearing a capitulation event, but it's early to tell.