The Day After

SAN FRANCISCO -- It remains to be seen if the predominant spin that Thursday's market action was "constructive" or even "healthy" proves accurate. For now, however, few traders are complaining much as the Dow Industrials dipped 0.3%, the S&P 500 lost 1.1% and the Nasdaq Composite shed 1.9%.

Still, I suspect many of the same pundits now saying it's expected for markets to "retrench" or "back and fill" after Wednesday's monstrous advance were surprised by Thursday's setback. Were you?

Clearly, the sources I quoted last night were expecting more gains.

"I thought we'd get some follow-through -- not a monster follow-through, but I thought we'd get more than this," said John Bollinger, founder of BollingerBands.com in Manhattan Beach, Calif. "I guess we have to live with what we get," -- although it will take a few more trading days to fully determine the sustainability of Thursday's advance.

The fact trading volume on the New York Stock Exchange was a record 2.1 billion shares, while a hefty 2.6 billion shares traded over-the-counter, suggests "yesterday's bounce brought in a lot of willing sellers," Bollinger continued. But the fact that major averages sustained only modest declines suggests "that selling was met," particularly on the NYSE, where down volume outpaced up volume by only about 100,000 shares. Down volume had a wider lead in Nasdaq trading, about 260,000 shares.

In hindsight, there had been too much damage done previously for the Federal Reserve's jaw-dropping rate cut Wednesday to ignite an unfettered advance, Bollinger said. He noted the S&P 500 faces near-term technical resistance at 1355 (its 50-day moving average) and the Nasdaq at 2602 (its 20-day moving average).

"But that doesn't turn me bearish," he continued, reiterating a prediction that the Value Line New Arithmetic Index, which dipped 0.5% Thursday, will soon make a new high; followed by records for the S&P MidCap 400, which lost 1.9%, and S&P 500.

The takeaway being that one day does not a market make -- unless it's a day like Wednesday. It's doubtful Thursday's action changed anyone's mind on Wall Street about the meaning of what transpired on the previous day. Those who believe the Fed rate cut means the economy will avoid a recession, and that stocks will rally from here, continue to plan (invest) accordingly. Similarly, market players who believe the Fed's intermeeting ease was an act of desperation ultimately doomed to fail, remain so disposed.

Speaking of which...

He's Baaaaaaack

When Don Hays of Hays Advisory in Nashville renounced his gloomy stance on Dec. 24, many bulls snickered and cheered with delight. Meanwhile, several readers with bearish leanings emailed to complain that Hays had abandoned them by reversing just two days after he'd reiterated expectations for a sub-2000 Nasdaq.

Although the Comp never traded at those levels -- it appears to have bottomed at 2273 intraday on Tuesday -- the problem with the anti-Hays campaign is that the strategist has proven more right than wrong of late.

Hays' reversal on Dec. 24 was attributed to a rise in bearish sentiment and an expectation the Fed could cut interest rates "in the next two weeks." (Personally, I think the fact he was headed for a two-week vacation also factored into the timing of the outlook change.) At the time, Hays forecast "a few more weeks of scares, fits and starts," but ultimately a "trading rally with good upside potential."

The second half of that call remains to be seen, but the first part was pretty good. A Nov. 28 prediction the Nasdaq would hit a "major bottom" in the ensuing three to six weeks also appears to have been prescient. (For his longer-term track record, go here.)

Thursday morning, Hays penned a report in which he forecast the near-term advance -- from which he has previously predicted an upside of 15% to 25% -- "will be the last interlude rally before the 'new era' and 'old era' join hands and jump off the cliff together in their unilateral third bear-market phase."

Previously, he suggested the "third-phase" decline could begin in the spring and send the Dow to as low as 7000 and the Comp below 1800. (He did not reiterate that call on Thursday, however.)

As was the case in November (when it was less chic to say so), Hays again forecast the U.S. economy will fall into recession and that the Fed funds rate will hit 2% in the next 12 months vs. its current 6%.

"In the third phase of the bear market, as it becomes obvious that the economy has not responded to the dramatic drop in short-term rates, and earnings plunge further as deflationary forces impact those great 'business plans' of last year, cash and bonds will begin to resurface in these public 401(k) accounts and in mutual funds," he wrote. "I expect the next six to 24 months to be very difficult times for the majority of investors who follow the headlines of today. I expect the lemmings to get absolutely annihilated."

Hays' advice to investors is "don't be afraid to take short-term gains. To heck with tax considerations. This will be a time to stay alive."

P.S.

My reporting on Hays' calls does not mean I condone or root for them. They are offered to counterbalance what I expect will be an orgy of optimism from the bullish gurus in the coming days, about which I also will report.