Hopeful Sign: If Selloff Stays Shallow

Will stocks stop dropping on bad news? Never mind the auto hearings, that is the No. 1 question on trading desks today.

Stocks are down Thursday, but the relatively modest decline (50 points, or 0.6 percent on the Dow), the light volume, and the breadth (3-2 declining to advancing stocks) is far less a response than one might expect given the poor news flow.

This has happened several times in the last two weeks, and it has made traders somewhat more optimistic. The S&P 500, as of yesterday, has been up seven of the last eight trading sessions.

Consider what is happening today:

1) DuPont : trading UP. even though fourth quarter guidance is well below expectations, 2009 earnings guidance is not nearly as bad as expected ($2.25 to $2.75 versus analyst expectation of $2.80)

2) Retailers: trading UP. Though sales, for the most part, were down double digits, the numbers were not worse than expected.

3) Nokia : trading UP. Said handset market volume would be down 5 percent or more next year. But the whisper numbers were that they would announce volume would be down 10 percent.

The pattern is clear: news is bad, but in many cases it is not as bad as feared. This means the Street has become extremely bearish, and any kind of news flow slightly better than expected will help.

Now, here is another important test: if we follow the usual pattern, the market will soften even more toward the close into the jobs number tomorrow morning. That's what has happened ahead of most big numbers in the past few weeks.

If this does not happen, it will be another positive signal to the markets.

Does it mean the bottom is in? No, because the news flow could always get worse; but it would be important to break the "sell at the close" mentality.

CNBC's Names in the News:


General Motors

Ford Motor


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