Friday, August 26, 2011

Don't Look For Bernanke To Save Us

The market opened under some selling pressure this morning after yesterday's selloff and a weaker than expected GDP report this morning.

Q2 GDP growth was revised downward to 1.0% from an earlier estimate of 1.3%. So far the first two quarters of 2011 are showing pretty weak growth. I sure hope we see a bit of a pickup in the second half.

But the big news event of the day was Bernanke's speech at Jackson Hole. For the life of me, I don't think anyone actually thought he was going to surprise the world with an announcement of new QE3 measures. More likely, he would reiterate that the Fed will remain accomodative, and that they have additional tools to employ should conditions continue to deteriorate.

True to form, that's about exactly the message he gave. Initially, the market swooned following his comments. But then I think rationality set it, and the market has since rallied all the way back to positive territory. There is still a lot of time left in today's session, so we will have to see how we close. But so far this is pretty constructive action.

Investors should realize that the Fed has remained extremely accomodative, and eventually this should begin to kick in. Mortgage rates have come down a lot, and there are rumors that the govt. might sponsor some sort of national refi program. Getting a bottom in the housing market would help a lot. Also, Obama is supposed to announce some new jobs program soon. That would help as well, as lowering the unemployment rate would improve consumer sentiment. But for now the focus is likely to remain on the problems in Europe.

Asian markets were mixed overnight; the dollar is lower today; oil prices are flattish near $85.35, and gold prices are higher at $1778.

The 10-year yield is lower to 2.19%; and the VIX, which has remained stubbornly high, is down 9% currently to 36. It was never able to get below that 20-day average support level I talked about earlier this week. Hopefully next week it can close below 35 and work its way back down to 30. That would be the first signal that traders expect this heightened volatility to diminish somewhat.

Trading comment: The S&P 500 has bounced back roughly 4% from last week's closing levels. Moreover, despite all of the choppiness the SPX has held above its recent lows around 1120. So for now it looks like that 1120 will hold as a successful floor, and the SPX could lift further from these levels. That doesn't mean we are out of the woods entirely, but that we might be able to rally to higher levels before we get some sort of retest of the recent lows. If we do see a further rally, I will likely continue to employ the same strategy of lightening up on lagging stocks, and staying defensive with our index hedges.


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