Courtesy of John Nyaradi
Bulls Fight Back
Bulls get even with a spectacular show of firepower after their recent beating. But is it sustainable or the proverbial “dead cat bounce?”
As incredible up and down moves continue, the bears “won one” today as they came roaring back to start off the week in spite of a more than terrible August Empire State Index report.
At Wall Street Sector Selector, we anticipated the possibility of a bear market rally or dead cat bounce and closed our defensive positions at market open and moved 100% to cash today.
Closed trades and realized gains look like this: (excluding commissions, dividends, taxes)
SDS: 2X inverse S&P 500: +15.6% (opened on 7/18/11)
SKF: 2X inverse Financials: +27.7% (opened 4/18/11)
SH: inverse S&P 500 +5.9% (opened 3/24/11)
SEF: inverse Financials +15.3% (opened 3/24/11)
DOG: inverse Dow 30: +7.8% (opened 5/16/11)
RWM: inverse Russell 2000: +11.5% (opened 4/18/11)
EFZ: Inverse Europe, Asia -3.2% (opened 8/9/11)
IWM Put Option: +61.1% (opened 6/7/11)
XLF Put Option: +158.6% (opened 6/7/11)
XLE Put Option: +60.2% (opened 6/7/11)
If you’re at all interested in joining Wall Street Sector Selector, now would be a good time to do so as we’re 100% cash which is generally a good starting place rather than entering during continuing trades already underway.
Today’s action was a fairly typical relief rally after intense selling that left the markets oversold and exhausted.
Causes were ostensibly the Google and Motorola Mobility deal and hopes for some sort of “Eurobond” announcement coming from an emergency meeting tomorrow between the German Chancellor and French President in their ongoing efforts to contain the contagion in Europe.
Furthermore, the Fed’s Jackson Hole meeting is on the horizon on August 26th and everyone is hoping for a replay of last Augusts’ meeting at which Dr. Bernanke unleashed “QE2” and started a sustained stock market rally into the end of the year. This is certainly a strong possibility, although a politically and economically dangerous road to travel.
We believe that we will see a short bear market rally and so will wait it out on the sidelines.
However, medium to longer term, we expect significantly lower prices ahead.
We base this belief on the technical indicators we have been discussing recently, including the “death cross” and various sell signals generated in point and figure charting methodology.
Also, the fundamentals remain horrible, and today’s Empire Manufacturing report was no exception, declining -7.7 compared to a prior reading of -3.8. The report very clearly outlined how business conditions continued to deteriorate last month and the future outlook was the lowest since February, 2009, with future new orders the lowest since September, 2001.
In our opinion, a double dip recession is very high probability event and it will likely be worse than the last one since we are starting with 9% unemployment, the consumers left standing are weaker than they were in 2007 by a wide margin and the government is out of bullets in terms of stimulus and monetary policy.
Expect extreme volatility ahead as the bulls and bears continued their pitched battle.
Global Market Summary:
Dow Jones Industrials (DIA): +214; +1.9%
S&P 500 (SPY): +25.7; +2.2%
NASDAQ (QQQ) +47; +1.8%
Russell 2000 (IWM): +21.1; +3.0%
Tomorrow’s Action:
Tomorrow brings reports focusing on housing starts, single family permits and industrial production, along with more earnings reports.
Have a great evening,
John
Click here to learn more about John’s book and for a free membership to Wall Street Sector Selector
