Bear Rally or Turnaround?

| About: Direxion Daily (TZA)

Last week, we experienced another strong 3-day rally, which pulled us back to the trading range set since April's high. There is no doubt that short-term, markets are on a strong upward trend. The question remains the same: is it still a bear rally or the start of a real economic turnaround?

From a technical point of view, major indices are still below their 200 dma, trending downward. Although the volume was good last Wednesday, it was not so last Thursday and Friday. Any given rally needs strong volume to prove its legitimacy. Further, my fellow Seeking Alpha contributor, Richard Shaw, provides an excellent article talking about entry points for major indices. Unless these indices reach the right level and stay there for at least 3 consecutive days, the real bull trend is not well established. It is better to put one’s money at the sideline, instead of losing money in a direction-less, range-traded market. We had a 6-day rally at the beginning of August, ending with the worst month in the year. This rally needs to prove itself beyond the first week.

Let’s look at the job report. Dave Rosenberg, one of the Mr. Dooms, dug into the “good” report, and found “softness beneath the surface” (Source:

  • Flat aggregate hours worked.
  • All of the employment gains were part-time—full-time employment, according to the Household Survey, plunged 254,000.
  • Those working part-time did so pretty much because they had no choice, and their numbers surged by 331,000—the biggest increase in six months.
  • Of the 67,000 rise in private-sector jobs, 10,000 reflected returning construction workers who had been on strike.
  • The 27,000 shrinkage in manufacturing slots and flat total goods-producing employment are hardly evidence of a vibrant economy.
  • That contraction in the diffusion index is consistent with an economy slowing down to stall-speed.
  • The aforementioned rise in U6 is reason enough to suspect that we’re not about to see a sustained acceleration in wages.

On top of that, this article from ZeroHedge provides one good point on how accurate the job report is:

(This administration) naively expect(s) people to believe that the labor force in August 2010 (154,110) was lower than that in August 2009 (154,426). That in the meantime the US population grew by 2.5 million seems to make no difference to the administration.

Last but not least was the good PMI number coming out of China, at 51.7% in August from 51.2% in July. The number is not good at all. First, seasonally, August's number is better than July. Second, that same number stood at 52% this February, meaning that a month at the end of shopping season has a better number than a month heading into shopping season. According to this article (in Chinese), China will face severe debt issues as early as 2011 as local governments’ debt bloated to officially more than $1 trillion. The real number could be higher. China banks are holding land as the collateral for the debt. As the central government is forced to rein in the real estate market, land could become illiquid. Strong head winds are awaiting China’s financial system.

Markets could go higher or build a base from the current level. Bulls need to be careful with stop orders.

Disclosure: long TZA

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