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This Stock Market Has No Memory

NEW YORK (TheStreet) -- This stock market simply has no memory from day to day.

After taking a downside hit on Wednesday, following the Federal Open Market Committee meeting, the markets looked to have downside follow through on Thursday morning. After a 60 point down opening in the DJIA, the markets quickly turned around and soared higher, closing up over 100 points to 16,332.

The S&P 500 (^GSPC)  closed up 11 points at 1872, within range of a new all time high. A buy the dip, sell the rip scenario that was mentioned here on Tuesday certainly took place. The top callers in this market have certainly been premature.

A major concern on these up-days is the lack of buying volume. The volume on Thursday was lower than the sell volume on the downside on Wednesday.

What appears to be developing from a short-term perspective is adding fuel to this market, given what the Federal Reserve said on Wednesday, that traders and investors are looking for a stronger dollar and higher interest rates. Unfortunately, that was last year's playbook.

That may ultimately prove correct again, but it's too early to make that assumption. This appears to be just a technical move based on an oversold condition. We have the dollar and the 10-year bond in a bearish trend, which is a three-month or longer time frame. Until some technical levels are breached on the upside, we cannot get to bullish in our analysis.

In addition, the stock market, so far in 2014, has an inverse correlation with the dollar and interest rates. As the dollar and interest rates are falling, the stock market is rising. This is the complete opposite from 2013, when the stock market had a positive correlation with the dollar and interest rates. When the dollar and interest rates were rising last year, the stock market was rising also. This year, as the dollar and interest rates are rising, the market is falling.

What this all means at the current time is that when the stock market goes up, the dollar goes down over 80% of the time and interest rates go down over 70% of the time on a daily basis. Correlations can change at any time and they must be recognized by traders and investors to properly position themselves in this volatile market.

Again, this all has to do with the growth slowing scenario in this economy in 2014. We cannot continue to have a weak dollar and falling interest rates, and the utility and inflationary sectors, such as gold, continuing to lead the markets on the upside. That is not a recipe for a strong stock market.

What is going to become critical as this market moves forward in 2014 is the growth slowing scenario that the Federal Reserve may be missing. They have a tendency to operate on a six month lag time frame.

This stock market requires being flexible and patient in your buys this year. The market is very volatile and whippy from day to day and the buy and hold strategy just may have the most risk as we move forward.

A few large cap stocks, stocks with a market cap in excess of $4 billion, that appear to be oversold on a short term basis, are International Paper (IP), Safeway (SWY), Xylem (XYL) and Facebook (FB).  One stock that I did have a long position, that was mentioned in Tuesday's column, was Netflix (NFLX - Get Report). I sold that stock Thursday morning for a nice profit.

Disclosure: Richard Gobel doesn't currently have a position in any of the stocks mentioned above.

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Chart of I:DJI
DOW 15,973.84 +313.66 2.00%
S&P 500 1,864.78 +35.70 1.95%
NASDAQ 4,337.5120 +70.6750 1.66%

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