Buy Weakness Below SPX 800 for Rally into Year End
From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin’s Daily Trading Report, please click here.
It was anticipated that after the 10/10/02 bear market low of 769 got reversed last week that there would be a sharp rally into the holiday and month end. The SPX gained +21.0% in 5 days from the 741 low (11/21) to the 896.25 month end close led by the financials and energy sectors.
There was no reason not to expect a significant pullback this week, but the -8.9% SPX mini meltdown yesterday was an unexpected fear move. Bernanke gave his normal dour speech in Texas, and said the Fed was ready to step in and buy the long bond if needed, and reiterated once again that it would do whatever was needed in order to right the markets.
The market accelerated to the downside in the last hour on Paulson’s speech, but it was primarily because the key SPX 840 (10/10/08) support level was taken out on the 3:20 PM bar, and the SPX traded down to the 816.21 (-8.9) close. Trading Service members capitalized on the break. This now makes that 840-850 zone key resistance again.
The NYSE volume was 1.63 bill shs Monday and all one sided as the Volume Ratio was just 1, and breadth at -2475. The BKX and XBD were -17.5%, which follows +28% and +34% gains last week, while the OIH was -14.9%, and XLE -10.6%, following +16.1% and +12.9% gains last week. The U.S. market is now trading like a third world market and that is bad for everyone except day traders. We get round two this week of Detroit and the no nothing Congress, but we all know the Democrats will give them the money, but will not make the Co’s break the union and get inflated costs in line, because why do the right thing rather than the political thing ?
Next week has some key longer term time dates, and weakness into that period means a strong upside bias into year end, especially if it starts from below 800. I also believe that the Fed’s stimulative policy approach will succeed, and credit spreads will continue to narrow. The panic rush to Treasury Bonds has lowered the Stock/Bond Ratio (SPX/TLT) to 7.46, which is historically low and will be a catalyst for the market going forward as the swaps from bonds to stocks get going. However, if the Democratic union bias in Congress/Obama leads to protectionism, and the Fed fails to maintain a stimulative monetary policy, the SPX will drop to 550 in a flash.
Have a good trading day!
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