Wednesday, March 12, 2008

Fed Squeeze

The markets rallied strongly yesterday, presumably on the Fed announcement that it is increasing the amount of liquidity available to the TAF, but has anything changed besides giving up some of the unrealized profit in the current short position? The answer is no. The VLE did not rise 4%. The Tides are still bearish. The markets are still below last week's highs.

One media source reported that this was the largest market rally since March 2003, and by implication, that it is the start of a new bull market. However, for the Dow 30, at least, this is not true. On July 5, 2002 the Dow soared 3.58% closing the day at 9379.50. The volume was lighter, but that may have been due to the holiday. In any case, the Dow went a little higher the next day only to reverse at the 25dema and eventually closed at 7702.34 on July 23, 2002 down 17.88%. I am not saying that this will happen again, but rather traders cannot assume that Monday was the bottom. There is still a lot of work to do to confirm a new rally.

I personally think these government interventions when the markets are closed are extremely manipulative and dangerous. While it is certainly true that large and fast swings can occur when the markets are open, such announcements by government officials pre-market are designed to create panic buying which is counter to free-market principles. An announcement during market hours would have possibly allowed the shorts to exit in a more orderly fashion. However, it should be kept in mind that these interventions rarely are the real catalyst to change the market trend that they are believed to be. Just look at the graph at the top of the front page of IBD today. There is no correlation between Fed action and subsequent market movement.

As far as the three systems presented here this year to date, all are still on a sell. The huge short covering rally yesterday probably had more to do with the fact that the McClellan Oscillator was at -215.28, a level from which many rallies have begun, but not every such rally succeeds. It will take several days to prove the direction one way or the other.

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