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Oversold Conditions More Important Than Bernanke?

  • Written by Syndicated Publisher No Comments Comments
    August 26, 2011

    After four straight down weeks the market began the week with a rally, supposedly on hopes Fed Chairman Bernanke’s Jackson Hole speech tomorrow will include indications of the Fed coming to the rescue of the economy and market.

    But as the week progressed the market continued to rally, even as opinions changed to expectations that Bernanke will not say anything different than was said in the Fed’s announcement a couple of weeks ago after its August FOMC meeting.

    That is probably because the market’s technical condition was going to produce at least a short-term rally anyway.

    I was so sure that the very oversold condition beneath 50-day moving averages, and the oversold condition of our short-term technical indicators like the Relative Strength Index would result in a rally off the oversold condition that I and subscribers took our significant double-digit profits from our May 8 downside positions on August 10.

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    As the chart shows, the first attempt to rally began explosively, but failed after only three days. The market immediately gave back almost all of its quick gains. But the major market indexes remained oversold beneath their 50-day moving averages. And another rally attempt has been underway this week, at first as I said on hopes that Bernanke will promise some form of QE3, and continuing even though that hope has faded.

    The rally attempt is still an iffy thing. With the moving averages themselves rolled over and moving lower the oversold condition isn’t as extreme as it was two weeks ago. And in the background evidence is mounting that the economy is sliding further into a recession.

    But the potential double-bottom from a higher low on the Dow and S&P 500 is encouraging.

    Meanwhile, tomorrow morning’s first revision of 2nd quarter GDP growth, of which we are not hearing many predictions, may be more important to the rally than what Bernanke may say in the afternoon.

    A downward revision of the already disappointing initial GDP report could halt the rally attempt, while an upward revision could be a significant catalyst to keep it going.

    The GDP report could also have an effect on what Bernanke does say. A downward revision of 2nd quarter GDP, indicating the economy is even closer to a potential recession, could cause some last minute scrambling to include rescue assurances in his speech. An upward revision could add support for the Fed’s expectation that the economy will recover in the second half and its wait and see stance.

    So again, I believe tomorrow morning’s 2nd quarter GDP revision will be a more important event than Bernanke’s speech which seems to be getting all the attention.

    Have Bonds Finally Topped Out?

    Bonds have been defying the Fed and even ‘bond-king’ Bill Gross for almost a year now.

    They declined sharply during the winter even as the Fed was engaged in its huge QE2 bond purchases. They began a sharp rally in February just as Bill Gross was announcing he was so bearish on U.S. debt that he had dumped all U.S. treasuries from his giant Pimco Total Return Fund. They then sold off some in June, only to spike up in July and August as a safe haven in the stock market correction. They continued to spike up even after Standard & Poor’s downgraded U.S. debt from its AAA rating for the first time ever.

    They’ve been down over the last week or so. Is their rally finally over or is it just a brief pullback from the short-term overbought condition?

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    Meanwhile, our technical indicators have kept us pretty much on the right side of thee moves. So far this year we have taken one profit from the downside in January, from our October positioning in the ‘inverse’ bond etf TBF, and two profits from buy signals and positions in the bond etf TLT, for a compounded total of 28% in 10 months.

    To read my weekend newspaper column ‘Has The Relief Rally Ended Already?’ click here!

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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