Thought I would pass this on
There were several headline-generating news items today that market observers will explain today's rally with (Dow +65, SPX +4, Nasdaq +12). These items include the 1) stronger than expected Retail Sales data before the open, 2) Bernanke's statement that "from a technical perspective, the recession is very likely over at this point," and 3) reports that Warren Buffett said he is buying stocks. While each of these factors is important and a positive, today's extension to fresh 11-month highs is more likely the result of continued momentum/short-covering off of yesterday's reversal higher, after today's initial pullback proved once again to be short-lived.
Before the open, equities saw a direct positive response to the better-than-expected econ data (Retail Sales, PPI), but the pre-mkt gains could not extend and were met with selling at the open. However, typical of what we've seen over the last few weeks, the initial pullback was limited in scope, holding the first technical support level (at 1044 in the S&P 500). Then during a Q&A session Fed Chairman Bernanke made what some are viewing as a bold statement, saying that "from a technical perspective, the recession is very likely over at this point." While the declaration made immediate headlines, the market saw no immediate reaction.
Today's gains are being led by commodities and industrial related groups, with a reversal lower in the dollar fueling gains in energy and metals, and new frost concerns driving the ag complex sharply higher (corn futures were limit up on the concerns). REITs are also showing notable strength, after reports that the Treasury adopted rules allowing lenders to revise commercial real estate loans without triggering tax penalties in an effort to stem a rise in defaults -- a move that would be positive for REITs. Finally, the rally in low-priced highly speculative stocks continues, with a large number of sub-$5 stocks surging on no new developments.
Many traders have been positioning for a more meaningful market correction, but it just hasn't materialized, as pullbacks continue to be short and shallow. This situation leads to nervous shorts that may be inclined cover their positions sooner, with more and more shorts getting forced to cover as the market trades to fresh highs, fueling the upward move at each successive high.
The current scenario of many traders being positioned for a breakdown is similar to what happened in mid-June when there was a brief breakdown in the major averages that scared the weak hands out, followed by a squeeze right back up to the highs. However, the S&P is now up 20% from the mid-July lows in a nearly uninterrupted move higher.
So with today representing the seventh up day out of the last eight trading days (with the one exception being Friday's two-point pullback), we'd attribute the continued gains more to momentum and continued short-covering, than to a particular fundamental catalyst. Even with a large number of participants viewing the market as overbought, the upward trend is likely to continue until there is some sort of catalyst with enough power to reverse the current trend.
wtg on the ROYL
gl |
