Bernanke’s Burden

I don’t want to temp fate. I’m not trying to jinx it. I
understand that stocks (and gold, and oil) are rallying on the Fed’s promise
and the falling dollar.

But this rally just doesn’t want to reverse.

Yesterday was wide open for the bears to take prices lower.
Financial stocks, usually thought of as stock market leaders, were absolutely
crushed. It was a rout. Bank of America (NYSE:BAC) got creamed for 5%. Citi
(NYSE:C) lost 4.5%. Even JP Morgan (NYSE:JPM), after a good earnings report,
was down as much as 4% at its lows of the day.

And still, the S&P 500 battled back to close above
support/resistance at 1,172.

Yes, the dips to buy have been quick and not particularly

We’ll see a real sell-off at some point. I can tell you now
that if all the Fed does is pledge $500 billion to buy Treasuries, stocks may
well head south in a hurry. Not only will the Fed need to double that number,
it will also need to get a lot more creative with how to deploy it than
simply buying Treasuries.

The Fed’s announcement is 14 trading days away.

I won’t be
surprised if traders get cold feet and take some profits ahead of that
announcement. It wouldn’t be a shock to see a couple down days that

But I keep looking at that 52-week chart of the S&P 500.
It peaked at 1,219.80 on April 26. That’s 46 points from yesterday’s close.
Another 4%.

Even though the S&P 500 has put in a phenomenal 12.7%
move off the August 31 low, it’s tough to call current levels ridiculous.
Especially if earnings keep coming in good.

Now, I want to
share some thoughts from one of my Wyatt Investment Research colleagues with
you. The following is from Jason Cimpl’s daily e-letter,
TradeMaster Market Forecast, from yesterday

In the second week of September I increased the price
target for the SPX to 1172. SPX hit and exceeded the target yesterday, but
the index had difficulty holding onto those gains today. Truthfully, I
believe the market is more near a top than a rally extension. But I would
increase my target if the market runs into next week Monday.

The indices entered overbought territory yesterday –
Finally. I fought tooth and nail to explain to subscribers that the market
was not overbought over the past month despite an incredible rally. It is
important as a trader to recognize that an extraordinary price move does not
always correspond to overbought indicators.

In addition to the indices being overbought, our U.S.
currency – Bernanke Bucks – are at an extremely oversold territory. A rebound
of any kind is long overdue. The rally in the Bernanke Buck would easily
bring the market down 3%-4% rapidly

I gotta say, I love the term Bernanke Bucks.

Now, Jason is the trading strategist for
Daily Stock Alerts
. I’ve told that he closed two
quick stock trades for 40% and 16% in the last few days.

Jason also writes a free e-letter every afternoon, focusing
on trading opportunities. You’re welcome to put your email address on his
distribution list. He’s pretty good. Here’s the LINK.

I wanted to share his comments from yesterday with you
because he makes an important distinction. Stocks may only be slightly
overbought. But the dollar, er, I mean, Bernanke Buck, is “extremely
oversold”. So the threat to the rally isn’t necessarily stocks and their
valuations, it’s the U.S. dollar.

I’ll also tell you this, Jason is still holding a couple
upside positions. He’s tightened stop losses to protect gains, of course. But
he also knows prices could go higher.

Also, I don’t know if you watched the earnings video Jason
shared with us on Monday, but he called several of the biggest earnings
reports this week correctly. Jason’s promised me another video to discuss
next week’s big earnings movers. Look for it in Monday’s Daily

Finally, I’ve got a couple reader questions to get

Mike asked: My
question is simply this, if the Fed is about to dump another $500 billion
into the system, in your opinion, how does this effect the potential for a
“double dip”. I’ve been left confused about this lately… those proponents
who say the market falls in the Fall; those who purport a dip; and your own
sense of what’s happening… leaves me confused.

Back when the “double-dip” talk was reaching a crescendo, I
came out and stated clearly that I didn’t think the economy was headed for

Recessions tend to be event driven. There needs to be some
kind of shock to the system. Sure, there could be some icebergs lurking out
there that we simply aren’t seeing. But the ones we can see — unemployment,
oil prices, federal debt — aren’t threatening to derail the recovery in the
near future.

One quick word about debt and energy, though. I do believe
that energy prices are a looming problem, as is the Federal debt.
Interestingly, a proactive energy policy could also be the solution, or at
least part of the solution, to debt problems. We probably have a few years
before these issues come home to roost. Let’s hope somebody in government
makes some good choices.

OCLTC asked:
I’ve watced C going down to the single digits several times over the last
30 years. The last time to rise to almost 60. For the long term 5 to 10 yrs.,
would this be a smart move to hold on?

I have a hard time seeing why it would be a bad idea to hold
Citi for the next 5-10 years. It’s a bit stuck for the next few months as the
Treasury unwinds its position, but once that’s done, you have a dividend and
better earnings from an improved economy to look forward to.

Of course, I’d like to hear your thoughts. I’ll even print
them. Write me here: [email protected]

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