We had an interesting mix of expectations going into Fed Chairman Ben Bernanke’s comments Friday morning, and, unsurprisingly, it produced volatile action.
Initially, market players were concerned when Bernanke didn’t mention any specific new monetary approach for the ailing U.S. economy, but after a little reflection a consensus developed that something is likely to be announced after a two-day meeting in September. We will have to go through the same thing we experienced today once again, but the bulls are optimistic that something is coming from the Fed that will be market friendly.
I suspect that some overly aggressive positioning by the bears also helped contribute to the strong reversal to the upside. They were thinking that since nothing specific was announced, we’d see a run for the exits. When that didn’t happen, the bears ended up as short-squeeze fodder.
While it was a clear victory for the bulls Friday, the big picture remains murky. We are now in a clear trading range between 1120 and 1205 of the S&P 500, but the intermediate trend is still downward. Predictions that we will hold the recent lows look a little better now but the macro news flow can turn things quickly.
The biggest negative is that European sovereign debt problems remain largely unresolved. Germany has been under tremendous pressure to save Greece, which is hanging by a thread again. Greece obviously wants to default and start over. Germany won't let them, because that starts the dominoes falling. Many European banks then fail. Obviously, the U.S. economy and poor consumer sentiment is a headwind as well, but it’s the uncertainty in Europe that the market is struggling to discount.
I suspect it is going to be a bumpy ride again next week, as end-of-the-month games and then the start of what is the weakest month of the year. Tech tends to get slammed in September. Will AAPL see $400? Or $330? The bulls really need better macro news flow to turn this market but, at the moment, there isn't much on the horizon.
The good news is that this poor market action has created bargains.