Tuesday, August 05, 2008

Big Bear Market Rally

Top Line: Tuesday's move was definitely not what we expected. These types of giant up moves usually happen in bear markets, oh, that's right, we're in one and a day like this confirms it. The pattern has developed differently than we had considered but is still Just a correction of the drop from May to July.

When we put our post to bed last night, we thought we might have a little rally on Tuesday but for some reason the futures were up overnight as the European markets opened. When our markets opened they were on a tear and they never looked back, all day long. Prices just went up and up and up with hardly a rest all day. This type of move is what we were expecting about a week ago to complete the upward correction but it did not materialize then.

The media indicated that the market was up due to oil being down and not because the Fed left rates alone again and didn't raise them. That is an odd comment after Monday's trading when oil was down nearly $4 and the market was heavy all day. But, who are we to argue with the all knowing media?

As for the Fed, they are in a box because the world has identified inflation as a problem (to us, inflation is yesterday's news) and the Fed wants to show that it is being diligent about inflation, please. The Fed knows that the credit crunch is in full force and they are trying to stem the tide of credit going out.

Meanwhile, oil and gas prices are falling in the past month and many other commodities are falling, too. The quintessential commodity, that would be gold, is dropping strongly, too. Today's move brought gold solidly under $900, with the price dropping about $22. So, while the Fed is paying lip service to their fight against inflation, commodity prices are way ahead of them.

After the market closed, CSCO announced that they had beaten earnings estimates by (are they serious?) one cent. Mr. Chambers was less than his normal optimistic self but the stock moved up strongly after the announcement anyway. So, the market, at least the NASDAQ anyway, is set up to open strongly again on Wednesday morning.

This apparent followthru from today's trading will be telling, but we think the market is very near the top of its range. As you know, this month we are keeping track of the closing level of the VXO, a volatility index. Today's level is

FSI: 81.72 (good move but not even close to the highs of July)

VXO: 22.05 -2.80 (down 11.27%, fear has left the stadium)

SDS: 65.69 -3.81 (ouch)
QID: 42.94 -2.89 (double ouch)

Dow Industrials: 11,615.77 +331.62 (highest close since the July 23rd high)

Yes, we do have a few more pics of Jackson and we will put them up tomorrow. You gotta come back for those.

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