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D Fry Market Outlook 09 08 2007

You like thrill rides? The 2007 stock market roller coaster has it all. Wednesday featured another last few minutes of jamming stocks higher into the close.

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You wouldn't think breadth would be good after heavy volume selling between 2-3:30 PM, but it was nonetheless. Monday's big rally had horrible breadth, but yesterday had a more positive bias.

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Please note how oversold markets were based on the -100 plus reading on the McClellan Oscillator below (click to enlarge):

McLellan 09 08 2007

No matter your point of view, you have to give the bulls a hand--perhaps a real "shout out" even! With all the bad news around and some folks screaming Armageddon if the Fed doesn't cut, you'd think bulls might be just a little gun shy -- but no.

There are plenty of conspiracy theorists around pointing to these end-of-day jam-jobs as the work of the Fed, the Treasury and/or the Plunge Protection Team, but, the bottom line is we just don't have any facts to support these claims. What we do know is that hedge funds and trading desks are in control of markets. Retail money flow to has been flat to negative. Wall Street trading desks have gotten the majority of their earnings from "trading" and program trading accounts, which account for nearly 40% of all trading activity. Brokerage firms and mutual funds are fee addicted, and they have learned to do all they can to keep money from walking out the door. That, coupled with the cheerleading from the financial media [bears don't advertise], gives the bullish bias a shot of adrenalin.

The Treasury discovered in 2002 that they could lend excess tax receipts to their network of primary dealer brokers short-term. There's nothing wrong with this, since you might as well earn some interest on these funds until they're needed. But one wonders if it's a mere coincidence that this activity corresponds to higher trading profits for these firms? It seems as logical a conclusion as B following A. Over the past two weeks the Treasury has been unusually active in these lending activities.

Beginning August 1st, there have been daily loans which now total $37 billion, just like the gonzo one featured below. That's no mere bag of shells for "Da Boyz" to use.

Treasury tax and loan investment program 09 08 2007

Treasury Secretary Paulson was chattering about how he's "watching the financial markets very closely." This just added more to the conspiratorial sentiment that's bouncing about.

It's important to understand the structure of markets. I see the markets today as a bullish geared machine stuffed with cash. Attempts to fade the market have proven either an outright failure, or only successful for the briefest periods. Does this mean that markets will never go down again? No. But global growth and the current market's bullish bias are hard factors to ignore.

The winners so far this week are mostly in the biggest names [again], tech and financials.

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The major short squeeze was in the financials where shorts "had" been shorting with impunity.

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Even real estate related markets got in the act with shorts getting viciously squeezed.

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Other markets enjoying big turnarounds this week were in two popular sectors, utilities and dividend related.

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Lost in the shuffle was the lousy Treasury auction where foreign central banks participation was low, and another round of selling in the dollar.

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A quick look overseas is all the time we have left, so we'll just highlight the BRIC markets.

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Big Wednesday? More like the squeeze from hell. Many respected analysts have issued sell signals including the Dow Theory -- so I'm told after Friday's close -- and Lowry's Research the week before. Even Cramer got market conditions wrong, so at least he's not infallible. What a relief, eh?

Are we living in a new age? Sure. Times change, and with it market forces and structures. Brokers are now primary dealers. The Treasury is trying new tricks. Hedge funds and trading desks dominate. The stock market feels like early 2000 again. Global economic growth and perhaps even leadership are changing. And so many more unusual or new factors are affecting financial markets.

One day we have markets obsessed about credit conditions, and when there's a lull in that negative story bulls retake control. We're living in interesting times indeed!

Disclaimer: Among other issues the ETF Digest maintains long or short positions in: Financial Select Sector SPDR ETF (NYSEARCA:XLF), streetTRACKS KBW Bank (NYSEARCA:KBE), iShares Dow Jones US Real Estate ETF (NYSEARCA:IYR), PowerShares DB Energy Fund (NYSEARCA:DBE), iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT), PowerShares DB US Dollar Index Bearish (NYSEARCA:UDN) and streetTRACKS Gold Trust ETF (NYSEARCA:GLD).

Source: David Fry's Market Outlook for Thursday