Bulls: We're Close To A Bottom

Once again, a midday drop in the dollar has led to a (modest) rally in stocks. This happened yesterday. Traders are not stupid (they're just poor). They notice patterns. Something works, they do it again. They do it until...it doesn't work.

The bulls game plan for a rally.

This is an important few days. The bulls are desperately looking for a rally, but how to get one with no clarity on TARP, stimulus, or bad banks? That's an awful lot of unknowns. The good news is that expectations are fairly low on all government intervention now, and we will certainly have news on at least two of these fronts, probably by Monday. That will be helpful.

More modestly good news: stocks that have had bad news today (Dow Chemical , Ford , General Motors, UPS ) are trading up, or in the case of GM did not drop on the bad news.

And how about this: notice how everyone thinks the non-farm payroll report (on Friday) is going to be a disaster? Notice how traders today take whatever the consensus estimate is on economic news and then add 20 percent to it?

So, for example, consensus is expecting 500,000 job losses in January, but traders are walking around saying, "You watch, we'll have over 600,000 jobs lost." How do they know this? They don't, they just know that the consensus numbers have been really wrong, so they are trying to compensate.

What this means is that a fairly sizeable drop is getting priced in, and it would take a pretty large number to get a sizeable drop in the market.

Bottom lines, bulls argue: we are getting more confident that we are close to a bottom, which leaves a lot of room for a rally that could last more than a week.

How about some out-performance, finally? Stock picking hasn’t mattered much in the past few months, but bulls are trying to change that. They note that there has been some out-performance from healthcare (up 20 percent from the November lows), while financials have lagged, down 3 percent. True, there has been little if any out-performance among individual stocks within sectors. Expect that to change when traders become more confident about the outlook.

Fundamentals will matter again!



Questions? Comments? tradertalk@cnbc.com