CVI CVR Energy Inc

Whenever the market makes a powerful move against the prevailing trend, it's good to look at the catalysts, the force of the move, and the likely participants.

After the US Labor Day holiday, Tuesday trading saw an initial fear reaction as sober weekend news from Europe was absorbed.

But an interesting thing happened on the way to another 2% meltdown. The market, as measured by the S&P 500, came close to the last swing low on the morning of Ben Bernanke's Jackson Hole speech -- and then it reversed.

Below is the chart showing that reversal where the S&P traded down to 1,140 (just above the Friday August 26 lows around 1,137) and then rebounded higher to close at 1,165.

I've been saying for a month now that 1,100 on the S&P was a potential "extreme value area" because of the amount of time the market spent gravitating around this round number between October 2009 and September 2010. To say nothing of record earnings near a conservative $90 per share estimate (for the index constituents in aggregate) creating a P/E multiple of 12.

And I pointed this out before the test and apparent "double bottom" at S&P 1,120.

So I made this chart Tuesday night in preparation to shoot my regular Wednesday video presentation. My theme was going to be taking advantage of the "low-risk buying opportunity" the market was handing you with the confirmed test of the last swing low and the resulting strong reaction the other way.

I wanted to emphasize how you had to think a little counter-intuitively (i.e., contrarian) to take advantage of fear and apparent bearish momentum. If you saw my video last week, you heard me say that the market tends to "fool the most people" and that it appeared to be sucking in people to the long side just as the relief rally was ending.

After Tuesday, I started to think that the market could be setting up for a run-away move to the upside when nobody was looking.

What often happens at these points of uncertainty and tug-of-war is that a violent resolution is reached. In this case, the market could run away and everyone would miss it. Well, not everyone. Not the brave and contrarian.

My argument that this was "low risk" was based on two factors:

1) You had confirmed institutional buying interest at 1,140 (above prior swing low) that vaulted the market back up to 1,165

2) You had a very close stop-loss point (1,135 to 1,140) to use if the market should decide it was wrong about being so bullish

Force, Catalysts, Participants

How do we gauge the force of this reversal? By what happens the next session, of course. And by the time you are reading this you no doubt have seen the strong push higher in Wednesday trade that took the S&P above 1,195 (nearly a 3% gain).

What are the catalysts that have institutional players buying the market (and blowing out the shorts)? Surely they can't have priced-in the worst of possible fallout from Europe. But maybe there are financial rescue plans in the works that could prevent collapse there, or at least buy more time.

What are other risk assets saying? I've been watching crude oil and copper for weeks as canaries in the mines of risk appetite and they are not dropping dead in fear of recession.

And obviously, market participants are thus far pleased with the leaked details of Obama's jobs plan, which could total $300 to $400 billion in infrastructure stimulus. To what degree politics-as-usual hinders his plans seems to be discounted for now.

What's true and what's an illusion? I don't know what will prevail in the economy or Congress. But I do know what the message of the market is saying. And as you can see below, it is saying "Bulls Rule!" For now.

Accordingly, I have kept many of my bullish positions in energy, industrial, and materials stocks such as National Oilwell Varco (NOV), CVR Energy (CVI), Cummins (CMI) and Southern Copper (SCCO).

Kevin Cook is a Senior Stock Strategist with Zacks.com

RELATED ARTICLES

Why You Need a Trading System

S&P Chart Looks Bullish: Support at 1,140

Defensive Stocks Pay Off

 
CUMMINS INC (CMI): Free Stock Analysis Report
 
CVR ENERGY INC (CVI): Free Stock Analysis Report
 
NATL OILWELL VR (NOV): Free Stock Analysis Report
 
SOUTHERN COPPER (SCCO): Free Stock Analysis Report
 
Zacks Investment Research