Banks Gone Wild
The market cranked higher yesterday. It was the most bullish day of the month and maybe the year. Nearly every stock, from every sector, was higher by three percent. But there were leadership sectors and financials was one of them. The financial index, which is comprised mostly of big banks, was up 6% yesterday.
Over the past two months I have been looking for bank stocks to rally. I wasn't looking at banks because I like them, or think they are great investments. I looked at big bank stocks to gauge the strength of a rally. It continues to be my belief that a big rally in the market will have big bank participation, if not outright performance leadership.
Also, it's no wonder the banks blasted higher yesterday - the intervention by central banks was directly aimed at helping out big banks. Yesterday, the Fed along with five other central banks agreed to lower the cost of dollar swaps in an effort to boost liquidity. The news yesterday that six central banks would collude to boost global liquidity sparked another great rally in stocks. More importantly, there was a big rally in speculative sectors like small caps and bank stocks.
Fast money likes liquidity. So any maneuver by a central bank that increases liquidity also increase traders' appetite for risk.
The move in the market on Wednesday was strong, and it happened on high volume - something we haven't seen in a while. While I welcomed the massive bullish session, I'm a little sore because it was not tradable.
Over the past few weeks I have expected a rally to happen. The first target was 1197 and a break past that resistance area would lead to a move to 1250.
On Monday, SPX gapped up to basically 1197 and yesterday SPX gapped up to 1235. The SPX has moved 7.5% this week, and 6% of that move occurred during closing hours.
It's frustrating, but there will be another opportunity. And the indices are at extreme overbought near-term levels, which should provide us with a mild pullback to enter new long positions. I think 1220 will contain any selling momentum, and the bulls may actually set up a new support zone near 1232.
I think the market is likely to rise for the next few weeks. And I think traders will jack SPX above 1,300 before 2012.
Besides the underlying momentum built by the increase in liquidity due to central bank interference, the market should also move higher due to increased positive news about the economy. Yesterday, housing data and employment data both crushed expectations. And most other economic data has shown growth this month.
Europe is the only economy on the brink of recession, but even weak European countries have continued to grow and avoid an outright recession during the past two months.
I can't get on board with the bearish arguments. And I've caught a lot of heat for not being bearish. But days like yesterday, where four days of decline were erased overnight, are why I stayed with the bulls. And you can't cover because the entire move happens outside open market hours.
It sucks when the market moves to an extreme in one direction and your bet is against the move. I've been there, it's a helpless feeling knowing that when the market opens you are going to be crushed. I'm certainly glad we didn't follow what the analysts on CNBC recommended - to have bearish exposure - and it's my hope that you didn't too.
Where do you think stocks are headed this month? We'd love to hear from you, email us at marketforecast@wyattresearch.com.
