Wednesday, June 24, 2009

7 Reasons To Expect A Short Term Bounce

I can think of at least 7 reasons why the equity markets may bounce over the short term.

1) End of the month mark-ups.

2) End of the quarter mark ups.

3) Coming into the July 4th holiday and trading will be light, so it should be easy to push the markets around.

4) The markets are oversold. Figure 1 is a daily chart of the S&P Depository Receipts (symbol: SPY) with the McClellan Oscillator in the lower panel. The McClellan Oscillator measures market breadth (in this case the NYSE advancing and declining issues). This is deeply oversold but not to the levels of March, 2009.

Figure 1. McClellan Oscillator

5) Assets in the Rydex leveraged bear funds are now exceeding those in the leveraged and bullish funds, and recent extremes in this ratio have led to moves in the opposite direction of the consensus. See figure 2, a daily chart of the S&P500 (symbol: $INX). So too many bears (red line in graph) relative to bulls (green line) like now has led to short term market up swings; too many bulls relative to bears (like last week) has led to market downdrafts. See this article for the most recent mention of the Rydex leveraged assets.

Figure 2. Rydex Leveraged Assets

6) The 200 day moving average. I cannot forsee any scenario where the market will rollover without a fight at the 200 day moving average. This is the bull's "line in the sand", and the Pavlovian response of traders around this "key" level is what makes a bounce a bounce.

7) While there is always risk ahead of the Fed meeting today, I cannot imagine that they will say or do anything that will harm share prices. In fact, the purpose of most statements from our public officials is to instill market confidence, and I don't see this dynamic changing anytime soon.

From my perspective the ensuing short term bounce is just market noise. This is still not the proper launcing pad for a new, sustainable bull market. However, I am on record of how I would "play" the market if the S&P500 closes the month above its simple 10 month moving average.


John said...

Good post! And what you think about peak - where we can finish this mini-rally? May be 930 - 940?

Thank you!

Guy M. Lerner said...

I don't want to get into the prediction game, but just looking at an hourly chart of the SP500 suggests that resistance is at 930 ish

thanks for the compliments however!!

John said...

May be - 930 is good digit. Intraday may be will be my range 930 - 940 :))

Tyler said...

Good post Guy. Why don't we make some new highs for this leg?
I think the market is drastically underestimating the possibility for good news on the horizon.

Guy M. Lerner said...

Hey Tyler: good observation; I guess you are delineating new highs from a new bull market scenario. It is possible; to buy into new highs and into a new bull market you have to believe that this time is different and you have to believe that fundamentals don't matter. I still think this mini bounce has more to do with end of the month portfolio re-balancing than anything else. Plus there are still bulls - believers - who are buying the dip