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Did Bears' Fear of Tuesdays Spark Afternoon Rally?

Scott Redler

The market opened higher to kick off the first trading day of June, but quickly picked up where it left off Friday, thanks in large part to the worst ISM manufacturing reading in four years. After that early selling, though, the indices found their footing around 11am ET, and the bounce picked up steam into the close to take stocks firmly into positive territory for the session. The Dow led the way with a 0.92% gain, followed by the S&P which finished up 0.59$, and then the Nasdaq which closed up 0.27%.

Many posited that the dismal ISM report--a reading of 49 vs expected of 51--would make the Fed more inclined to continue with its current open-ended QE. A reading below 50 indicates that manufacturing activity is contracting, rather than growing at a slow clip like we have seen for most of the nascent economic recovery. The "bad news is good news" for the market dynamic looks alive and well, at least according to market commentators.

While there was moderate selling among the broad indices in the morning, there were real pockets of violent downside action is various sectors of the market. The Biotech sector sold off sharply, with the SPDR S&P Biotech ETF (XBI) down more than 4% at one point before rallying into the close to finish down 1.24%.

The Homebuilders (XHB) also sold off sharply but rallied hard in the afternoon to prevent a potent down bar. The index finished the day down only 0.75%, but the intense early selling will certainly have traders' attention in the coming sessions.

A well-publicized development over the last week or so has been the quick demise of high dividend yield stocks, such as those in the Utilities (XLU) and Consumer Staples (XLP) groups. The story goes that with bond yields rising (due to growing rhetoric from Fed governors about "QE tapering"), investors will become less in need of the yield that low-beta, dividend-oriented stocks provide, and instead opt to allocate money to more cyclical, high-beta stocks. I think the "QE tapering" narrative has become a bit overdone. With inflation remaining below targeted rates and the employment picture remaining dismal despite the always-misleading unemployment rate (not to mention today's ISM reading), it's hard to believe that the FOMC will wind down its asset-buying program as soon as this Summer, let alone this year.

Today's action would seem to support that thesis--somewhat. Low-beta dividend stocks bounced hard off lows of the day and put in what look to be some short-term bottoming candles. Proctor & Gamble (PG), the staple of consumer staples, is a good example of this, as it rebounded from an early sell-off to finished up 1.17%, bouncing off a key support level. Bonds (TLT) also are holding above the neckline of the potential head and shoulders pattern, even if the ETF isn't sustaining much of a bounce.

The banks, which have been a source of leadership over the past few weeks, also rebounded impressively from early selling and look like they could continue to outperform.

As has become customary, the rest of the data this week (or more specifically, the reaction to that data) will be very interesting to note, highlighted by Friday's jobs report.

Japanese markets will also be worth watching the rest of the week. The Nikkei sold off sharply again last night to make it a 20% correction off its highs of the year, but the Japan ETF (EWJ) was able to bounce off lows during the US session. Could the volatile Nikkei lead a market resurgence, or will it's decline continue and be a harbinger of things to come?

Maybe we are simply over-analyzing today's action. Perhaps shorts, after some rare 2013 downside follow-through, were simply scared to hold their positions into a Tuesday, a day which has produced 20 straight winning sessions. That idea sounds wacky, but in the 2013 market, Groundhog Tuesday is part of the New Normal.

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*DISCLOSURES: Scott Redler is long EWJ, AAPL, AAPL call spread, KMB, UNXL, JNJ, BAC. Short SPY, long SPY put spread.