Good Luck Tomorrow Bernanke
The market stabilized yesterday as a long term support zone was tested. The bulls protected 1250, but the countertrend move higher did not look enthusiastic. This was despite the fact that volume raced higher again on Wednesday and total volume is way above average this week.
The high volume could turn out to be a good thing if the bulls can protect 1250 over the next week or so. But if the bulls lose that support, those additional buyers from earlier in the week will quickly look to cut their losses. And by cutting those losses, there will be another stint of selling that would push the market lower, perhaps by another 10%.
Today is a big day for the bulls. I don't think yesterday's rally off the lows was that impressive. At the same time, the indices are extremely oversold. I think the bears will take the market down again, but I expect a double bottom or a marginal low to occur. Given the oversold condition, the bulls should be able to start a relief rally that brings us back to 1280. But 1301 will be a brutal battle zone for sellers and buyers. I think the bulls are going to need a catalyst to jack the market back above 1301.
One such catalyst could be the unemployment data tomorrow. Over the past month initial claims and continuing claims numbers have been dreadful. But Wednesday's jobs number was ahead of expectations and the government has every incentive to massage the "official" U.S. employment data tomorrow. In fact, the government (and Ben Bernanke) really need a good jobs number tomorrow after the miserable first quarter GDP revision last week (from 1.9% to 0.4%). Also, the big banks, like JPMorgan, have lowered GDP estimates dramatically. But a positive jobs number goes a long way towards building a positive perception of an economic recovery.
Even if the U.S. economy (or global economy) shows improvement it is unlikely to stage impressive growth anytime soon. And since it actually looks like the U.S. economy, along with parts of Europe, will lurch on a recession we can expect the term QE3 to be thrown around.
Quantitative easing is a strategy used by the Fed to support interest rates, which in turn lowers borrowing costs. The low borrowing costs are intended to drive marginal lending, which should lead to greater investment, consumption and eventually job creation.
Of course, lower interest rates are futile if the banks that provide the loans are not willing to lend (I am broadly speaking of course since I was able to obtain financing for a new property earlier this year). Additionally, the lower interest rate environment promotes investment, but the Fed cannot control where money will be invested.
While the Fed would prefer new money funneled into durable goods or property, it can easily trickle into other asset classes that are not (were not) conducive to economic growth or stability. Because Ben Bernanke has explicitly said the Fed will take the necessary action to support the economy, and with the economy in shambles, traders may begin to price in QE3.
As mentioned throughout the past few weeks, I haven't viewed the U.S. potential default as a major bearish headline. I do however believe the recent economic data was frighteningly awful. The debt negotiations were amazing distractions that covered up terrible durable goods orders and a monumental first quarter GDP revision. And now that the bears have broken 1301 a large decline is back on the table.
But despite the grim situation I went aggressively long in our TradeMaster portfolio today. In fact, I have been eating up long trades this entire week and they have held up well despite the market's decline. Two of our newer positions CHRM and EXLS have even managed to move higher - for more trade ideas take a free trial of TradeMaster.
