Monday, August 20, 2007

Small Bounce After Friday's Rally

The market is opening up slightly following Friday's strong rally. The Nasdaq had its biggest percent gain in a year (+2.2%), while the S&P had its largest gain (+2.5%) in over four years. Not bad.

The strength carried over into Asia, where 5 of their stock markets gained more than +5% each overnight. And Japan rose +3.0%. The Yen is also moving lower today, a trend that would go a long way to improve sentiment.

Bond yields are moving lower again, with the 10-year yield hitting 4.64%. The Fed injected more liquidity into the system this morning, as it strives to ease the credit crunch. After their move on Friday, some investors likely feel that the downside risks have been reduced.

I would agree with that, to a certain extent. I believe the Fed showed that it will not merely sit on the sidelines. Moreover, I think the change in bias lends itself toward another rate cut in September. Hopefully the market will begin to discount some of this in the near future.

On the financial shows over the weekend, I saw a lot of strategists calling for the same sort of 'bounce and retest' pattern that I have been expecting. I don't like to be part of the consensus. If everyone is looking for this pattern, it will likely not come to fruition. You know the old saying about a watched pot?

The other two scenarios are that the market goes on to make lower lows, or that the next pullback is mild, and that we have already seen the lows. If I had to choose between these two, I would favor the latter scenario.


At 9:18 AM, Blogger John Forman said...

I tend to agree with you on the new drop not really reaching down to last week's lows, which would set things up really nicely for a move to new highs.

You mentioned the 10yr yield down today and the Fed stuff, but that doesn't represent the really interesting stuff. As I write this 3mo Bill yields are down 116bps today and 6mo Bill yields are lower by 45bps. And shorter stuff is even further down. It's crazy!

At 11:38 AM, Blogger J. Kahn said...

You are very right. The action in the T-bills is insane. I think it shows that the Fed needs to continue injecting liquidity, and also to cut the fed funds rate.


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