How Gap-Up Opens After Big Sell-Offs Hose Investors (DIA)

When you get a 500 point drop in the Dow Jones Industrial Average (NYSE: DIA) and a drop of more than 100 points in the NASDAQ after about two straight weeks of selling, bargain buyers try to hope that a high Volatility index will step in and that rational thinking will prevail.  Then a much better than expected jobs data in new payrolls plus a higher revision to a prior poor payrolls figure suddenly offer the support for a market rally.  So far this is not turning out to be the case.  These big gap-ups are traps and the triple-digit gains in the DJIA were taken away rather quickly.

There is a slang term in technical trading and it is not exactly fit for those with soft ears.  That is the “Gap & Crap” pattern.  Just like it sounds, the market gaps up much higher and then sells off immediately.  You see this over and over where the big gap-up openings are met with immediate selling.  All things being said, these ‘gap and crap’ moves after big sell-offs trap more running bulls than Pampalona, Spain.

The fact that this is happening on a summer Friday only exaggerates the situation.  The reasons are too numerous to count as to why the selling is happening.  Some key issues are as follows:

• The debt ceiling and infighting in Washington froze the business climate;
• U.S. business regulation is killing incentive;
• The stock market is now officially in correction territory and the 2011 gains are gone;
• Europe is total denial about the bank and sovereign debt situation;
• The PIIGS are going to be gutted;
• Interest rates even went negative momentarily this week;
• Currencies continue to be devalued globally;
• No U.S. government help is currently desired;
• Economic data points to slower and slower growth, or worse;
• Speaking of worse, the calls for a double-dip recession are growing louder and louder;
• Global austerity creates lower business spending;
• China and India remain muted and are not accommodative to growth today;
• Credit Suisse has just lowered its target to 1,350 from 1,450 for this year on the S&P 500 Index;
• Bailouts aren’t working.

Before you hit the panic button entirely, let’s consider at least some of the positive conditions as follows:

• Corporate balance sheets are stronger than ever;Dividends are on the rise;
• Interest rates are extremely favorable for those that can take advantage of it;
• Employment held up better than expected;
• Japan is still trying to recover;
• China/India ‘slowdown’ is still well above global trends of developed nations;
• Japan and Switzerland are trying to prevent cash bubbles forming further;
• The consensus remains for slower growth rather than outright recession;
• 2012 is an election year.

Admittedly, both of these ‘strengths’ and ‘weaknesses’ are only a portion of the key issues out there.  Thursday was a huge blow-up for the markets and the damage was seen early on Friday in overseas markets.  This is just one of those situations where the worst does not seem to have been seen yet.  Hopefully, that is not the case but that is how it feels.

Predicting the day-in and day-out moves is a game that very few can successfully do through time.  Since starting this piece the DJIA had gone from up triple-digits and down well into the red.  Then the recovery came and the market is fighting for a red-line or green-line for up or down. The market could close up or down today, but it is currently Europe that is acting as the biggest drag and the Europeans are going to have to capitulate before many investors will dip their toes back in a value mongers again.

JON C. OGG