Day 4 of Rally
Stocks took another bullish cue from Central Bank intervention to rocket higher and extend our current rally to a 4th day.
As I said here, these types of solutions are of the band-aid variety and are not long-term. The market is buying these piece-meal steps anyways based on the belief that the process, while painful, is still moving forward. This coming Friday, we have a meeting of financial ministers in Poland. Investors hope that further progress is made in the structural sense (Euro TARP?). Finally, in a couple of weeks, we have the German vote to pass the EFSF legislation. A yes vote would be further short-term bullish for markets.
Next week we have the Fed meeting where many expect some form of monetary easing to be announced. Markets may be giddy for this news so the rally may continue. However, what would the result be once the annoucement is made? Could it be a buy the rumor sell the news? I remain convinced that the Fed will only engage in an Operation Twist, at best. QE3 is off the table. If they decide to do Operation Twist, will it really help the economy at this point? Besides, recent core-inflation numbers are right at the Fed’s mandate of 2% YoY growth, 10-yr breakevens are still above levels that preceded the prior round of monetary easing, and gas prices remain in the $3.60-.65 category; I find it difficult for the Fed to justify additional easing on the basis of 1 of their 2 mandates, Inflation. Unemployment, the other, is a different story. On this front, they have every right to administer additional easing, but remember what QE2 did? Is the Fed going to risk $4.00 gas (due to rising commodities) when the economy is as weak as it is? Is monetary easing really the way to go? Again?
These events may support the ongoing rally as short-term bearish sentiment remains somewhat elevated. On a technical perspective, I’ll be looking at 1230 then 1270-80. If we break 1230, further upside is likely up to 1270-80. I expect a significant big bull/bear fight at 1270-80, which is where the neckline in the completed head-and-shoulders lies. The 200 and 100 day MAs also lie in the vicinity.
Btw, not much was made of the economic data today. None of it was good, but investors shrugged it off. The economy remains at stall speed and may even be entering recession at this point as the Philly Fed Index came in negative for a 3rd month in a row. Let’s not forget about the Empire Manufacturing Index either. Manufacturing, which has been largely supporting the recovery is alarmingly weakening.
In the Rearview Mirror…
Well that was fast.
Looks like investors have accounted for the risks inherent in the turmoil in Egypt, Tunisia, and now Jordan.
"Risk on" is back and markets have hit new recovery highs. The Bull run continues in earnest. Party On!
CAUTION IS WARRANTED! — RISK OFF.
So, the Ireland bailout is signed and a done deal. Unfortunately, the Euro has continued to fall and worse, Spanish, Italian, Belgian, and Portuguese bond yields have begun to rise at an alarming rate. At this point, it is clear that the bailout has not alleviated contagion issues.
But…but…how? Well, taking care of a debt problem by issuing more debt is just plain stupid. Unfortunately it’s how we’ve been papering over the structural problems that have been present since the recession started in 2007. The structural issues have NOT been dealt with.
At this point, I would seriously consider taking off risk. This scenario is quite reminiscent of when Bear Stearns went under and the problems were papered over by authorities. The risk of a systematic melt down is becoming more elevated by the week as market participants are beginning to realize that bailouts are not the answer.
Maybe something will happen where the issues disappear, authorities once again are able to snatch victory from the jaws of defeat, however, those jaws are very big and sharp and I believe that it would be very prudent to pair back risk at least.