Can Bernanke Save the Stock Market Again?
The market recovered in a major way. Volume soared as the bulls emerged and took the indices 4% to 5% higher, literally in an instant. Most indices hit session lows in the early afternoon, and were poised to close lower for yet another time. But in the last hour, the major U.S. indices burst higher to the tune of 7% to close positive.
The big gains from the indices on Tuesday erased most of the loss that occurred on Monday, which was attributable to the credit rating fiasco. Over the past few sessions I cautioned against going short. As I explained, the market could head lower, but that downside was minimal. And once buyers stepped in a sharp and quick counter-trend rally would ensue. Yesterday morning I was looking for that rally to commence, which is exactly what happened.
But don't think the bulls are out of the woods yet. And don't think this means we aren't about to unload our longs and get bearish.
The bears were able to clip through 1250 and 1197 support zones - that's impressive. A few weeks ago, after 1301 was busted, we knew the bulls had lost momentum, and another decline was likely.
I will be the first to concede that the rate of the collapse was more swift, severe and grim than anticipated. Yet, finally, two weeks later and 15% lower, stabilization has occurred. And now it's time for the bulls to step back in, drive shorts out of the market, and rally.
Yesterday, the bulls took SPX right back up to 1175, which is a major area of support. A strong bear would protect that level, but I think the bulls will at least put up a fight for a day or two and attempt to win that support area back. And a successful break of that resistance area should result in a move up towards 1197.
So long as the bulls protect 1145 this week, I think they will jack the market back up to 1197 before another new swing low is made. But once that final push occurs (up towards 1197) I think the bears will re-emerge, and we will have to adopt a short bias.
Yesterday's rally (and harami bottom formation) followed words from our nation's favorite economist, and purveyor of stocks everywhere, Ben Bernanke. In an unprecedentedly clear Fed statement, Bennie and the Feds pledged zero percent interest to 2013. By promising low rates for such a long time, especially after the credit rating was slashed, Ben Bernanke is all but guaranteeing another round of quantitative easing or the like.
The statement breathed new life into the bulls and sent a bit of fear into the bears, which caused some to cover their trades. The bulls need to keep applying pressure on the bears today, although with the negative headlines it will be tough. The Bank of England cut its growth forecast to 1.4%, said that there is more risk for the economy to the downside and raised inflation expectations to 5%. Also, gunfire was exchanged along the Korean border, which is the first public exchange of artillery since November. Lastly, earnings from major retailers confirmed a slowdown in consumer spending.
Although the economy has weakened over the past three months, the real beast the stock market needs to overcome is not fundamental weakness, but a lack of confidence. The historic decline over the past week had little to do with a GDP revision or a credit rating and more to do with a lack of confidence in the market by investors.
Much like in February, or March of 2010, when no one wanted to sell, the market continued to move in only one direction; higher. The attitude now seems to be the same, but the direction is the opposite. The decline in the market over the past two weeks was more severe, and less orderly, than the increase to the market in February 2011 or March 2010, but the result will be the same. At some point, buyers will step in and reverse the current downward trajectory. And after that counter-trend move, we can decide if the bears are for real this time (likely), or if this formed a major swing low.
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