Following two days of minor profit taking, stocks surged on Monday by between 6.0% and 8.4% for the small-cap Russell 2000. We saw the S&P 500 bre...
Following two days of minor profit taking,
stocks surged on Monday by between 6.0% and 8.4% for the small-cap Russell 2000. We saw the S&P 500 break back above 800, the NASDAQ at 1,500, and the Russell 2000 at 400. Yet, at the same time, the trading volume was not much heaver compared to the previous weeks. For instance, about 2.3 billion shares traded on the NASDAQ, which is only slightly higher than the five-day and 10-day moving averages. This is a minor flag, as what we want to see on strong rallies is high volume. Without this, the rally may not have enough market support to drive higher without a relapse.
Driving up the buyer interest was the release of the government's new financial plan to eliminate the toxic assets on the balance sheets of some of the numerous major banks. The premise behind the plan is for the government to lend funds to private firms to entice them to buy up to $1.0 trillion of toxic assets and bad loans. This is major undertaking and, according to an article in Associated Press, research firm Fox-Pitt Kelton suggests the plan will fail, as the funds are well short of what is required. The concept is interesting, but, again, it will eat up taxpayers' dollars to correct some of the mistakes on Wall Street. In addition, the plan still had lots of hurdles to work effectively. Economist James Galbraith suggests that the toxic asset plan will not work, as it will require more funds than proposed.
You also need to entice private buyers to buy the bad loans and toxic assets. Why would they take such risk given the current economic climate? The government will need to make the deal for private equity sweet. You got to believe the government will assume the majority of the risk contrary to what the Treasury is saying. I feel it will add to the deficit and cost taxpayers' dollars.
The rally appears set in place, but, as many of you know, I'm not fully convinced that the rally is sustainable given the continued high degree of market risk not only in the United States, but also globally. For the global economies to reverse, we need to see evidence of this and, so far, there is very little. Some are calling this a bear market rally. I'm not sure, but feel that this could be the case. The positive is that, with the strong rally, the recent bottom may be in place, while the near-term technical metrics have been improving. As long as the technical ratios strengthen, this rally could continue.
Investor sentiment remains extremely bearish, but it has been improving over the last week. Case in point: about 11.28% of all U.S. stocks are now above their 200-day moving average, up from 9.35% a week earlier and from 9.25% a month ago. The same goes for the shorter-term moving averages. For the market sentiment to improve, we need to see the moving averages trending higher, as we are seeing at this time.
The bottom line is to ride the rally, but to be careful on chasing stocks higher and take quick profits along the way.
Profit Confidential
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