Stocks Bouncing Back From Oversold Positions

Stocks are rebounding from an oversold condition, and the debate among traders is whether it’s just a quick relief rally or the start of a new move higher.

Mark Zuckerberg
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Mark Zuckerberg

While Facebook stock hit the skids on its second trading day Monday, the market shrugged it off and moved higher with the best day for Nasdaq stocks since December. Guided higher by a resurging Apple , the Nasdaq had the biggest bounce, rising 2.5 percent to 2847. The Dow was up 135 points, or 1 percent to 12,504, and the S&P 500 rose 1.6 percent, or 20 points, to 1315.

“In order to break that gravitational pull, we’re going to need to have some hard evidence that suggests what worries investors either has been triaged or cured. I am going to be looking for any kind of signs the rally is sustainable,” said Mark Luschini, chief investment strategist at Janney Montgomery.

Luschini said it appears there could be a short-term turn in stock prices, but there are other factors that should start worrying stocks, like the so-called “fiscal cliff,” combination of budget cuts and tax hikes for next year.

Europe also still hangs over the market, and any negative headline could easily derail the market’s rally. One of the next event markets are watching is the European leaders summit Wednesday.

The G-8, over the weekend, helped give markets a bounce after leaders embraced Greece, saying they want it to stay in the euro zone and that they would seek ways to foster global growth. But China also helped, with Premier Wen Jiabao signaling Sunday that China will focus on boosting growth.

Randy Frederick, Charles Schwab director of trading and derivatives, said he doesn’t believe the market sell off is over. “ My research tells me we’re not there yet. I believe we ‘re going to be in more of a ‘sell in May and go away’” trend, he said.

“We’re going down to at least the 200-day moving average on the S&P (1278),” he said. “I’ve been bullish on the year as a whole and I continue to think the summer is going to flatten out, then we come back in the fall. I think we easily could have another month of this.”

Paul LaRosa, technical analyst at Maxim Group, disagrees. “This should be an area where longer term money comes into the market,” he said. LaRosa said an important level was the 1290 on the S&P, reached on Friday. “I think the Friday could have been the bottom.”

U.S. economic news will be an important factor for the market, and of late, it’s been mixed. Existing home sales, reported at 10 a.m. Tuesday will be important since recent housing data has shown improvement. “Collectively it suggests that perhaps the negative that housing has been, hasn’t turned to a positive, but it will stop detracting from growth,” said Luschini.

Stocks that thrive in a stronger global growth environment led Monday’s gains, with materials up 3 percent; tech up 2.8 percent and industrials up 2.2 percent.

“I think if you focus on the U.S., we’re a lot more insulated and should be decoupling from Europe,” said Harris Private Bank CIO Jack Ablin. “…If you spend your time focusing on the U.S., the news is good. It’s not table pounding good, but it’s good and stable.”

What to Watch

Besides the housing data, there are earnings from AutoZone, Best Buy, Ralph Lauren, Williams Sonoma, DSW and Cracker Barrel before the open. Dell, PetSmart, Analog Devices and Guess report after the close. There is also a 1 p.m. auction of $32 billion 2-year notes.

J.P. Morgan’s trading losses will be the topic of a 10 a.m. Senate Banking Committee hearing. CFTC Chairman Gary Gensler is testifying.

Nasdaq OMX holds its shareholder meeting at 9 a.m. in New York. It should be well-attended after Nasdaq’s trading system fumbled Friday on the Facebook IPO, turning a one-time coup into a black eye for Nasdaq.

After closing just slightly higher on its first day, Facebook lost 11 percent Monday, falling well below the offer price, and it continued to trade lower in afterhours trading. Nasdaq’s bungled trading system, and Morgan Stanley’s pricing of the IPO were the focus of market talk Monday. Yet, analysts do not believe the sloppy trading in Facebook since its Friday IPO is going to impact the broader market.

“Personally, I thought the Facebook thing was way over done from the get-go, as far as its importance to the landscape,” said James Paulsen, chief investment strategist at Wells Capital Management. “It’s more that it’s sexy than impactful in the bigger picture of things. I think a bigger story today was the huge premium price paid by Eaton to buy out Cooper.” Eaton plans to buy Cooper for $11.8 billion in cash and stock at a 30 percent premium to its closing price Friday.

Facebook’s $18 billion IPO was a watershed event, awaited by the market for months. The young company, viewed by some as a new era tech bellwether and others as an overhyped social media play, ended up as a trading flop by most accounts.

“People get infatuated with a company and pay whatever the price. It’s a very rich valuation, and it came public in a bad market. It seems like the last couple of hot social media companies, like Zynga, Groupon and now Facebook, have not worked out,” said LaRosa. “Even if it did perform here, you could argue its p/e doesn’t go higher. I think the black eye here was increasing the size and increasing the price range. More than half the deal was selling shareholders.”

As for the overall market, LaRosa said it should not have an impact. “To me, Facebook doesn’t have an effect on Intel’s business plan or Pfizer or any of these other companies. It may have an effect on the IPO market, but I don’t think it has an effect on the overall market,” he said.

Steve Massocca of Wedbush Securities said professional investors are much more concerned about developments China and Europe, while Facebook has caught the fancy of individual investors. The social media company was seen by some analysts as a potential magnet for new investor money.

Massocca said Facebook’s immediate price decline is probably not yet a problem for that group of individual investors. “It will be more important where it’s trading in three months,” he said.

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