Why I Expect a Year End Bear Market Bounce

Global equities, high yielding currencies and commodities pursue their rallying ways in US trading as stimulus hysteria grips the world's leading economies. President- elect Obama's resounding push for an infrastructure-based stimulus package of more than $700 bln and a possible Congressional vote over as many as 3 bridge loans to US automakers as early as Tuesday. Obama's stimulus drive is particularly underscored by relegating federal budget deficit concerns to the bottom of economic priorities.

These announcements have proven to be a vital stepping stone for a much-anticipated bear market leap. Buying began to emerge in late NY Friday trading before news of a Detroit bailout plan or an Obama stimulus hit the wires. Fiscal stimulus announcements were also made across Continental Europe and India, while China could follow suit income tax cuts.

FX markets display the usual pattern seen in rising equity markets, with CAD, AUD, NZD and GBP flexing their higher yielding muscle against JPY, USD, CHF and EUR. The USD and JPY are the biggest losers as they bleed speculative flows into commodity currencies as well as GBP. Gold rallied over $20 off Fridays $741 low, but has yet to face substantial pressure at the $805.

click to enlarge

The S&P chart above shows the technical version of the bulls' failed attempts for any bull market rally. But unlike the past 9 weeks, the remainder of the calendar year will be relatively devoid of event risk (potentially negative events such as major econ data and corporate earnings), clearing the way for a flurry of potentially market-friendly developments from Washington (bridge loans to Detroit) and further details on Obamas +$700 bln stimulus. The 920 target may prove less elusive, a break of which will face more considerable pressure at the 960 resistance.

GBP/USD continues to offer unique volatility thanks to short-term spec. orders from Treasuries, bank desks and CTAs seeking to improve trading revenues on the rules of risk-driven market flows. Despite the bigger than expected 3.3% decline in UK Nov PPI and remarks from BoEs John Give indicating zero interest rates as a possibility, cable remains largely driven by the intraday flows in equities. UK CPI wont be out until next week, thus, the lack fo major data releases from US and UK seen offering prolonged room from for speculative upside. Short term range underpinned by $1.46 support and $1.4890 resistance, Intermediate gains capped at $1.4890 and $1.5030.

Comments

[logicalthought:]

This is a very useful column to write when the market is already up over 20% from its intra-day low of a few weeks ago. Where was your prediction on THAT day? Today you write that there will be a lot of resistance at S&P 960 (around 5% from now), and don't predict whether or not the market can exceed that point. You, sir, are a true seer.

2008 Dec 09 06:40 AM

[Trading to Win:]

I am going with Nassim Taleb and Charlie Biderman. The bounce may fizzle soon. Best to start building short positions.

Taleb is interviewed by Charlie Rose and it is worth watching.

Taleb thinks that Nouriel Roubini is actually underestimating the magnitude of the financial collapse.

2008 Dec 09 07:58 AM