Thursday, August 24, 2011 9:12 am EDT
DJIA: 11,320.71 S&P 500: 1177.60
If the Jackson Hole meeting and a speech by Fed Chief Bernanke were not taking place this week, I don’t think we would be having this rally. That said, be careful.
It looks like a double bottom, the first bottom occurred August 9 on very heavy volume, kind of a “flush,” where buyers dug in their cleats and said “Bring it !”
That was followed by a four day 900-point pop in the DJIA, a 750-point sell off to bottom #2 and the current rebound.
All very pretty.
Here’s my dilemma.
“Convention” tells me, “Close your eyes and buy, we have a double bottom !”
My instincts tell me, “Whoa ! Isn’t this a bit too cut and dried ? The market needs to do more work before turning up. What’s more, I see the odds of a drop below DJIA 10,000 as a smidge better than 50-50.
Money managers have to be buying, they cannot afford to be sitting on too much cash, they have to hedge bets just in case Bernanke does announce a Fed-based stimulus program.
While last’s year’s QE2 didn’t produce a sizzling economy, one must give pause to consider what would have happened without QE2.
What can go wrong ?
Europe, for one. The sovereign debt issues there simply defy a solution. From time to time, the crisis there rattles U.S. markets here. For the moment we are in the eye of the storm.
The greatest risk (short-term) is that Fed Chief Bernanke may have little to offer this week, prompting traders to bail out. Coupled with any bad news, this disappointment could jeopardize the double bottom and set the stage for a plunge below DJIA 10,000 (S&P 500 1100).
What can surprise?
The consensus is strong for a second recession or something painfully close.
That may not happen. The current slide in the economy may run out of steam, yielding to a gradual rebound that gains traction early next year. If Bernanke does NOT see the need for additional stimulus at this time, it should be viewed as a positive , i.e. it is not needed.
The writer of Brooksie’s Daily Stock Market blog, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk
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