Market Update: Does Fear Turn to Apathy at the Bottom? What a week! TGIF, right? After basically 15 days of slaughter, on Wednesday we saw a glimmer of hope....only to get smacked again on Thursday. Then this morning, unemployment comes in at 8.1%, which is the highest reading since 1983. So what happens? Stocks edged higher, initially, before heading south again. It leaves a lot of investors - us included - asking two simple questions... what is going on with the economy, and where is it taking the market next? Well, we've got some answers for you today, and some specific thoughts that just might make you some money.  We'll close with that information below. Before we get to it though, we see two things that need to be better addressed.    Perspective on Unemployment I don't want to dwell on this for too long, but the unemployment data - stunning as it is - isn't as stunning as its nearby chart. The S&P 500 is on the top; the unemployment rate is at the bottom. Ouch! Conventional wisdom would suggest more bad news, particularly of this dire caliber, would drive stocks to gravely deeper losses. It didn't though. Index futures rallied before the market opened, and the actual indices did the same once the opening bell rang. Though the gain has been given back (and then some), for stocks not to get completely pummeled is a relative victory. We've mentioned this before, but we'll say it again... perception is more important than reality. Though the actual numbers were worse than those forecasted by so-called experts, they were better than investors had expected. That's part of the reason for the partial reprieve. I think the bigger reason for the initial bounce and decent support, however, is a sense of finality... at this painful level of unemployment, it can't possibly get any worse.  Oh, that's not to say the unemployment rate can't go higher. But, from the average consumer's and investor's perspectives, unemployment at 8.1% is functionally the same as unemployment being at 10.1%. They're both inconceivably high.  There's also a small faction of theorists (I read them all) who felt a huge unemployment reading today could jolt the governmental powers-that-be into taking drastic action to stop the bleeding. I don't know if the government will or can, but I certainly understand the premise. One last thought... many forecasters, including your own government, are projecting unemployment will continue to rise through 2009, and may even reach 10% or higher. Fine - everyone's entitled to an opinion. But, I would caution you against (1) believing them, or (2) responding to their vocalizations.  This is not to say unemployment can't keep heading higher; it probably will. Not once, however, have any of these pundits specifically said why unemployment should continue to rise. All I need is a simple rationalization to prove to me they actually know why unemployment falls or rises. I suspect the only real reason they think joblessness will keep moving higher is based on the current trend, which isn't really an unreasonable idea. However, many of these folks are the same people who did NOT forecast unemployment would start to trend upward beginning in the middle of 2007. Some of them were even expecting it to keep moving lower at that time.  If they didn't see the upward trend coming then, there's a good chance they're not going to see the downward trend coming either. But aren't these people supposed to be our best and most brilliant minds? They probably are, but in my experience, journalists, economists, analysts, and especially federal government agency employees all have one common trait - none of them think cyclically. They all assume the current trend will last indefinitely, which we know isn't true. That's why the government is always behind the eight-ball... they're reactive rather than proactive. I don't know if the bear/recession cycle is winding down right now or not. It could be. I just know the forecasters are not going to see it coming.   Where's the Fear? Earlier this week in our 'Five Bear Market Realities You Can't Afford to Forget' edition, I specifically stated nobody really knows where the bottom is until well after it's been made..... including me.  However, I do want to point out something all those 'capitulation seekers' don't quite seem to know what to think of, though it may well signal that the stage for a bottom has been set. We've discussed the CBOE Volatility Index - or VIX - before. It's a fear gauge, and commonly used as a contrarian tool... meaning when fear is at its highest level, the market's on the verge of a bullish rebound (and vice versa). And, we saw those reversals work out pretty predictably through the end of last year. Then, things changed. With the market sinking to levels even lower than November's low, you'd think the VIX would be at or above November's highs, showing us a peak in fear. It's not though. It's not even close. In fact, it's alarmingly not even close. The nearby chart tells the tale. So what? Here's what - wouldn't it stand to reason with stocks in worse shape than they were four months ago (and the economy even more frightening) that fear should be sky high? Now, obviously people are concerned. They're not fearful, and they're definitely not fearful to the point of panic though - a big difference. Again, so what?  I have no empirical evidence to this, but my interpretation of this dynamic is real simple... people aren't afraid anymore because they're numb to it. They've got no emotional response (or capital) left to give. In other words, they're completely disengaged - they don't care.  And this may well be a sign capitulation is near.... because even the market's absolute worst doesn't even faze them anymore. Heck, unemployment went through the roof, and the market perked up for a while after the announcement (even though it didn't hold). Indirectly, I think it may be a hint that all the money which was going to get put on the sidelines is now there... and there's a lot of it. Said another way, traders - and maybe even institutional managers - are so far removed from the game they're not even trading the options that drive the VIX higher or lower.  Yes, you're understanding it right.... this bear market may hit a bottom not with a big capitulatory fear spike, but rather with drawn out period of apathy. The only downside to it would be that there's no clear pivot/reversal day. We could linger in the doldrums for weeks, if not months, and climb out of it slowly. Just be prepared for that possibility, if you were waiting on a clear capitulation day.   Reading the Tea Leaves Bottom? Not a bottom? To even try and make the call on a Friday morning (just a few hours after a dose of unemployment news, no less) is probably not the best time to figure it out. However, based on what we can see as of right now, the pump looks primed for a trade-worthy bounce. First and foremost, the market is way oversold. Normally I wouldn't care about an oversold or overbought market, but since October, stocks have been making pretty decisive reversals once extremes were hit. I like to use stochastics as my oversold/overbought tool, which as you can see on the nearby chart has been pretty effective of late. Second (though a close second), there isn't any major economic data scheduled to come out next week that could disrupt a bounce. Retail sales come out on Thursday, but we already know from other sources February was rough. The Michigan Sentiment Index comes out Friday, but we already know pessimism is sky-high. So, we shouldn't get any curve balls that could pull the rug out from underneath any rebound. Will any short-term bounce be the first stage of "the" long-term recovery? It's just too soon to say. Like I said above, I think the stage is set, but frankly, nobody has the information they need to make such a call. I don't want to waste my time trying to figure out the unknowable when there are decent odds of a short-term bounce in the meantime.  As for today, it's a Friday, and the end of a very terrible two weeks. I don't think there's enough motivation or inspiration floating around today to drive stocks upward significantly, as most traders probably started the weekend early. You may be able to quietly slide into new trades today though, to capitalize on a dead-cat bounce. On the other hand, the way stocks peeled off their early highs and fell into the red a few minutes ago may also be enough of a reason to just pack it up for the weekend, and wait to look for entry opportunities on Monday morning.  Either way, I don't see anything happening over the weekend (other than China clarifying their stimulus plan) that would cause a major bullish gap when trading restarts next week. Plus, that would give you a chance to factor in any new information uncovered between now and then. I still think a short-term bounce is coming though. Have a good one.