Setting the stage for a Dead Cat Bounce

With Yellen on deck, Fed's Bernanke to stick to low-rate vow

SAN FRANCISCO/NEW YORK (Reuters) - Federal Reserve policymakers will likely leave intact their delicately worded easy-money message when they meet next week, despite a surprisingly sharp drop in U.S. unemployment that threatens to make a central part of that message irrelevant. Top Fed officials believe their landmark decision last month to reduce the pace of the U.S. central bank's bond-buying stimulus was well received by financial markets. That, in turn, allows them to make another $10 billion cut to the bank's monthly bond purchases at the January 28-29 meeting without needing to adjust their promise to keep interest rates low in the future.

The message is clear, hoard your cash because the buying opportunity is near.

Companies sitting on cash pile of over $1 trillion

Corporations are hoarding cash: despite dividends and buybacks, cash is likely to hit another record high. Cash set a record in the first quarter of 2013 on an absolute basis: $1.093 trillion in the S&P 500. It has set a record for 18 of the last 20 quarters. With 47 percent of the S&P 500 reporting,we are once again on track for record cash levels. What's going on? The short answer is that companies are not spending as much...they have record earnings, but they are holding on to a lot of the money.

Is it possible to plan a dead cat bounce? I doubt it, how would we do that? When everyone is waiting for the certaintly of a dead cat bounce then we get a smooth correct as bears set various traps on the way down. But soon we will find out!

Survey: Mid-Sized Companies Still Holding Back on Hiring, Investment

Mid-sized businesses are holding back on hiring and investment because of unpredictable health-care costs, a lack of clarity on federal regulations and expectations of slow domestic economic growth, according to a quarterly survey of firms.
“A majority of middle-market companies said that uncertainty regarding government policies is impeding their ability to grow and their willingness to hire and spend,” according to the Middle Market Indicator, a poll of 1,000 executives from companies with revenues ranging from $10 million to $1 billion.

Uncertainty makes sense, but it also makes dead cat bounce. So where are we? A crash or a smooth correction? Dunno, in fact there is a lot the economy and I do not know. But the market is hoping:
A stock market correction measured in time

Last year, the stock market moved in one direction: up. So far in 2014, it has traded in a sideways pattern.
After Tuesday's small gain, the Standard & Poor's 500 stock index is down 0.2% for the year.
But a flat market might not be such a bad thing. It's better than a falling market, especially with worries of a pullback mounting after last year's 30% gain and valuation metrics suggesting the market is no longer cheap and, perhaps a tad overvalued.
The slow start has many investors hoping that the recent rut turns out to be a sideways correction that will be measured in "time," rather than the more traditional "price" correction that's measured in losses of 10% or more for indexes such as the S&P 500.

We can only hope. A downward correct managed by time is called a Euler path. Down is the only direction it works, and if DC doesn't screw this up we might be smooth.

What will retail investor say?

As a percentage of household assets, stocks are now 28.7%, according to data from the Federal Reserve.

"By no means are the households shunning away from the equities, like they did during the late 1970s and early 1980s," writes financial blogger Tiho on The Short Side of Long.

But, what's interesting to note is that the last time stocks approached 30% of assets, the market peaked and corrected within a year. That, of course, was at the time of the financial crisis five years ago.