Thursday, September 08, 2011

ECB Not Cutting Rates Yet

The markets were lower in early trading, but as of this post they are firming and moving back into positive territory. Yesterday the markets enjoyed a strong rally, bouncing back from 3 straight down days. But volume yesterday was again nothing to write home about.

The dollar is gaining at the expense of the euro after ECB President Trichet relayed a downward revision to GDP forecasts for the eurozone. Thanks, Jean. Everyone knows growth is slowing. So why don't you lower interest rates instead of keeping them at 1.50%? You will cave eventually, so why not get out in front of the data? Silly.

Tech is leading the early action, while financials are lagging so far today.

The weak dollar has helped push gold prices higher to $1853, and oil prices are also up to $89.65.

The 10-year yield is flat around 2.02%; and the VIX is slightly lower to 32.80. For this rally to have legs, I think we need to see more of an allocation out of bonds and into stocks. That means we would have to see the yield on the 10-year move higher. I also think we need to see the VIX come down even more. It remains at historically elevated levels.

One indicator moving in the right direction is the AAII survey. Bears are now 40%, which exceeds the number of bulls (30%) by a healthy margin. We need to see bearish sentiment hit extreme levels in order for the selling to exhaust itself, and this is a step in the right direction.

This morning we will hear a speech from Bernanke at the Minnesota Economic Club, which could move the markets although I doubt we will hear much new stuff. And later tonight we will hear Obama's new jobs plan, which I have very little faith will actually have a big impact on the high unemployment rate.

Trading comment: I want to highlight that there are some stocks acting well during this market bounce. VRUS is making new highs; LULU looks like it could be breaking out again; JAZZ is at new highs; MJN is acting very well; AAPL has continued to hold up well; PSMT is also right near its highs. So it's okay to hold stocks exhibiting excellent relative strength. But rallies should be used to get rid of lagging stocks, and overall long exposure should be hedged to be safe. I prefer using the inverse index ETFs to hedge my downside exposure. Hope that helps.



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