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Tuesday was a day that needed no introduction! The start of this quarter was a mirror image to the "Black Swan" start of this year. So much for my earlier note warning of lower lows and lower highs on the S&P 500 and NASDAQ. So much for an "eerie" VIX that looked ready to soar ever higher again. Instead, the market finally punched in a convincing follow-through to March's buying rally. The market made good use of the freshly minted dollars that Fed has been issuing to help prop up credit and by extension the stock market. The S&P 500 and the NASDAQ soared while the VIX got crushed anew.
Of note, TraderMike made the more appropriate observations about the market technicals when he pointed out the pattern of consolidation. It is now time to officially tuck away all bearish thoughts in a dark, but warm, corner and accept the bumrush of liquidity. While there is ample resistance overhead, I cannot get 100% bearish again until the market at least violates the lows of Tuesday's big day. In fact, the S&P 500 would need to drop below 1314 before I even think about S&P 500 at 1200 again.
Even the dollar stood its ground against its multi-decade lows. It seems counter-intuitive that the dollar might put on a significant show of strength even as the Fed continues dropping interest rates. However, the market may now attempt to predict a time when the Europeans finally cave in to their own sagging economies where their exports have been hurt by the weak dollar.
The bounce in the dollar has put silver and gold on the defensive. I would look for support for gold around $800/ounce or so where the break-out happened leading into 2008's spectacular 3-month run.
Some other commodities are feeling the pinch (although steel was a big winner again), and this will force the speculators to exacerbate the move as they shift money in big chunks back to financials, retailers, big-cap tech, and, yes, even homebuilders. So look for the Fed in its next statement to proudly announce that inflation pressures have eased and that the outlook for a second-half economic rebound is back on track. A big wildcard will be the international companies that to date benefited from the weak dollar play. Up until now, they have allayed fears about their businesses by proudly announcing that the U.S. was an oh-so small part of their business (think Caterpillar, Intel, IBM, etc..). It stands to reason that these stocks will lag any market rally...but then again, the market does not often stand up to reason.
Anyway, the confidence in U.S. financial system could be seen in oh so many financial stocks that soared. Even Lehman Brothers (LEH) ripped out the hearts of shorts by popping 18% on the heels of a multi-billion dollar dilution play for additional capital. Even hapless Thornburg Mortgage (TMA) was saved from bankruptcy and enjoyed a 20% pop on the day. (Disclosure: I am long TMA on as a "call option" on its survival - see disclaimer here).
So what now? If you are a bull, you have to love the current action and should feel more confidence that some kind of bottom in the market is at hand - even if the bottom gets built lower than 2008's current low. You will enjoy pundits and analysts declaring that the market has now priced in all the bad news, and we are all upside from here. Never mind that no one will really know what good news the market is starting to price in nor where that should end. If you are a bear, you have to focus on resistance levels and forget about the breakdown to new lows for now. You will hate hearing that "you cannot fight the Fed," but in your heart of hearts you will come to accept that the Fed is closer to winning again. Even if you also understand that today's swift action by the Fed will lead to tomorrow's new financial headaches. If you are a long-term investor, you won't even know what happened until the end of this quarter, 3 months from now, when you look at that IRA or 401K statement. (Click here for Oppenheimer’s Chief Market Technician Carter Worth telling us to calm down and let the market machinations develop).
Be careful out there!