Green Light for Gutsy Traders Only - Test of Lows in Near Future

George Brooks |

Stock Market Trading FloorBrooksie's Daily Stock Market blog

Wednesday August 10, 2011      9:26 am EDT

DJIA: 11,239.77    S&P 500: 1172.53

Today: Down at the open to DJIA 11,030 (S&P 500: 1148), then a rally beyond yesterday’s close. I EXPECT ANOTHER PLUNGE TO TEST YESTERDAY’S LOWS, but  maybe not for a week or two.

With interest rates so low and assumed to stay low for many months, where else can money managers go with their client’s cash ?  Obviously, the economic indicators will become bigger players going forward. Evidence that we will or will not get another recession is key.

Recap: With the DJIA at 12,143 on August 1, I warned that the rally following the announcement of a debt ceiling deal would be a fake-out and another leg would follow down to DJIA 10,700 – 10,830 (S&P 500:1150). The DJIA dropped to 10.588.55 intraday, the S&P dropped to 1119.28 before rebounding dramatically.

Yesterday, I said the market would rally to DJIA 11,090 (S&P 500: 1147) then trail off at the close, unless the Fed came with big news, in which case it had “room to run.”

It did just that until the last hour of trading when it became enormously volatile dropping  sharply, rising sharply on heavy volume suggesting a huge tug of war between “long” buyers and short-sellers covering positions and sellers using spurts to raise cash. Obviously, the Street read the Fed’s news as significant, since the DJIA closed ahead  430 points.

The Fed’s Open Market Committee (FOMC) announced yesterday afternoon that it would keep its benchmark interest rate (fed funds*) at a record low until mid-2013, It indicated it would employ additional tools needed to bolster an economic expansion it referred to as “considerably slower” than anticipated. In fact, it indicated that the, “downside risks to the economic outlook have increased.”

Glass half full ? Half empty ?

That’s the question investors  need an answer to here.  Investors can be heartened that the Fed is ready to go to the wall to prevent another recession, but that is only great news if they can succeed.

It looks like the Fed has tossed the ball back in Congress’ lap, more specifically the “Super Committee’s’ lap. Its composition will becrucial.  If it  is free of bone-headed obstruction, we have a chance on serious progress being made on the kind of debt reduction measures sought in the agreement signed on August 2. More ideological gridlock  will result in uncertainty among consumers and corporations,  raising the odds of another recession.

If this were a post-election year, I’d say the odds of cooperation between Republicans and Democrats is possible. But with a
presidential election 14 months away, odds favor obstruction at every turn in  an effort to defeat President Obama.

Conclusion:  The two most critical ingredients to this festering stew are: Can Congress function beyond pre-school ideological bickering and address debt reduction, as well as foster stimulus to the economy. Two, how much of a slowdown will develop in
coming months ?

According to studies conducted by the Stock Trader’s Almanac, there has never been a down pre-presidential election year in 75
years.  This year started at DJIA: 11,577 (S&P500: 1257).  Will this be the exceptionin light of Congress’ paralysis and the many negatives the country is facing ?

George Brooks

*Federal Funds Rate: Interest rate on overnight loans between banks. Decreases tend to stimulate the economy, decreases at extremes curb it.

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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