I Don't Trust This Market Rally

It wasn’t a question of whether or not a rally was coming, but when that rally would finally come. What we saw on Tuesday was a classic bear-market bounce as indexes soared across the board. These markets have been oversold for quite some time and news of the Federal Reserve injecting $200 billion of extra liquidity into the markets was all investors needed to start covering short positions and locking in gains. Will we see a follow-through to this rally in the coming weeks? Only time will tell, but history tells us that this rally will be short lived.

Fundamentally, we’re still a long way from setting a definite long-term bottom in this market. The pathetically weak dollar (no doubt induced by those rate cuts) is causing the price of commodities to American consumer to skyrocket. Even as I am writing this, gold is crossing the $1000 mark. Oil is hitting new records every day, touching $110.20 a barrel intraday on Wednesday, and if you don’t think that is hurting consumer spending in any way then think again. It comes down to simple macroeconomics: the more money people spend filling up their cars, heating their homes, etc., the less these people have to spend on “stuff.”

And what about the housing sector? I have yet to see any evidence of a bottom in that industry and I believe Robert Toll, the CEO at Toll Brothers (TOL), made it very apparent to investors what he thinks of the current sector when he was quoted as saying, “Current market conditions stink.” It doesn’t get any more to the point than that.

From a technical standpoint, the picture is fairly well defined. I don’t think there can be any argument in saying that the trends of the major indexes (DJIA (DIA), NASDAQ (QQQQ), and S&P 500 (SPY)) are all headed south and with the way the financials, the so-called “market leaders,” have been acting as of late, odds are the markets will continue to trade lower.

So with that in mind, let’s revisit that Financial Select Sector SPDR (XLF) chart: the XLF has been in a firm downtrend since August. This bearish trend was reaffirmed this week when the XLF continued its pattern of setting lower highs and lower lows, coming all the way down past the January lows of $24.11 to $23.5 before rallying to its current price at $24.6.

So where do we go from here? There is some fairly hefty resistance at the $26.2 - $26.3 area. That, coupled with the declining 50-day moving average should provide investors a decent area to start new short positions. From there, I’d be prepared to ride the XLF down past $23.5 to the new lower lows that should occur within the next month. I would look for the major indexes to follow suit.

The point is that we are in a consumer-lead recession, something that takes many months, if not years to heal. The smart money has increased its short interest in the market exponentially over the past few months and until we begin to see some fundamental improvements in financial sector, it might just be a good idea to keep plenty of cash on the sidelines.

Comments

[300mph]

What rally?

[Rainheavy2002]

This is one of the most stupid article on Seeking Alpha. It just recycles informations from CNBC, Marketwatch, and main media.

[Ming]

No. This week is too uncertain to be certain, which is why you need to have, amongst other things, your nose glued to your screen, *and* a satisfactory trading strategy. Now, what is a satisfactory trading strategy? Its a bit like asking what your bank balance is. But you can't call this coming week accurately and go off to play golf or something similar.

[Ming]

Well, just to note what the rally was, it was a +400 dow points, and subsequent decline over the next three days, leaving the dow (if you are a dow person) slightly up. The speed of the rally upwards suggests stale bulls are still in existence, sadly. Only hope they had the sense to cut their losses really quickly, with their nose to the screens. Well, they probably got hit with margin calls anyway. lol.