The stock market did its best impression of forgetting what happened on Tuesday as they rallied them to pretty much wipe out the losses. The title implies that the two days of trading have cancelled each other out. What does this mean? We think it means that if you didn’t sell on Monday and buy on Tuesday just before the close, you are in pretty much the same position you were in on Monday.
Seriously, the stock market is showing some strength but the pattern is showing an end. Our momentum indicators are close to overbought now with the market having managed only a modest recovery effort from the lows of two weeks ago. Here we are at the end of the month just in front of a holiday weekend and volume is light. These conditions combine to make for a questionable bullish period of time.
The main event is just around the corner as we head into the long holiday weekend. Our position remains that the market will head down in September even into October with a very violent drop. According to our readings, there is a lot of bullishness and heavy reliance on the Fed to take care of all of the problems.
The week’s events include some communication between Senator Schumer and the great Chairman of the Fed, Ben Bernanke. The Senator contacted the Chairman because he just wanted to make sure he was doing his job of caretaker of the economy, we should clarify that the words were actually markets from the Senator. The Chairman’s reply basically said that the Fed was doing their job and would step in if events threatened the economy, which we would say means that the Chairman will do something if the stock market drops.
As we have indicated for some time now, there is incredible pressure being applied to the Fed by the politicians and the Fed does what it has to do in these situations, say it is doing its job.
On Wednesday, the market traded as if nothing was going on in credit, or more accurately, there was nothing to worry about in credit because the Fed could take care of any problems that might occur. Sadly, that is not even possible. Yes, a rate cut would help the market for a while but we say that the only thing that can really help the economy is for credit to expand at a rate that is fast enough to keep the global economy going. We don’t have any idea what that is but we are pretty sure it is not possible this time around.
As expected the Asian markets are celebrating the US good news—you know, the fact that the market was up—by following suit and rallying, too. We are wondering about the staying power of this rally overseas. With the start coming overnight last night (Tuesday to Wednesday) in the US futures, probably just because the market had been down on Tuesday, we think that a full trip around the globe from last night to tomorrow is not going to be that easy. It could happen but we think the highs in all of these markets are being put in or are already in.
In our reading materials, we hear nothing about any problems and we think that means that people again believe in the Fed put, meaning they can buy stocks without worry. On the bus last night, the conversation was about buying call options on Countrywide Financial just because “They” won’t let anything bad happen. Those kinds of comments are just exactly what we mean when we talk about “complacency”.
The pattern in the US market is trying to shake the confidence of bulls and bears alike. The more bulls that lose confidence, the faster the market will fall. If the bears lose confidence, they can only drive the market up so much. Then the already invested bulls must continue buying. We think the bulls are pretty much still “loaded up” with stocks. The only thing left is for them to sell into the coming decline.