Tags: victor | riesco | fed | commodities

The Relief Rally Has Come to an End for Now

Friday, 19 Feb 2010 11:31 AM

During the last two weeks, the markets have staged a relief rally after a steep correction.

The sharp move down from the January highs quickly brewed panic in market participants.

On Thursday, Feb. 4, the down-to-up volume reached almost 36 to 1 on the NYSE Composite Index, which indicated climatic selling pressure.

Only during the March 2009 bottom was selling pressure stronger.

This condition, coupled with extremely oversold short-term momentum indicators, signaled that a short-term bottom was in.

For the quick and savvy trader, it was a good opportunity to go long and ignore the fear.

Since then, the S&P 500 has advanced from the lows of 1044 and reached the 1100 barrier yesterday.

However, things are far from being OK to stage another powerful rally in the stock market.

Some fundamental aspects of the economy and technical relationships between the markets have deteriorated during the last few months.

China has started to raise interest rates together with mandating larger bank reserves.

The intended effect is to slow down their economy and control the overcapacity and real-estate bubbles that have formed.

China’s change in monetary policy is negative for commodities and emerging markets such as Brazil, which is one of China’s main trading partners.

Also, the world has raised concern on government debt problems. This started with Dubai and then continued to Europe with debt-burdened PIIGS (Portugal, Italy, Ireland, Greece and Spain).

Both of these issues broke down the short dollar, long emerging markets/commodities trade to a point that the inverse is happening.

U.S markets are developing a trend to outperform the rest of the world together with the U.S dollar, which has been gaining strength against currencies and even gold.

Ironically, the U.S is the biggest debtor of all, yet the world still finds comfort with the U.S dollar when problems arise.

Yesterday, the Federal reserve surprised the market, prior to options expiration, by raising the discount rate from 0.5% to 0.75%.

The decision by the Fed caused an immediate selloff in the S&P 500 futures while the dollar rallied.

Higher rates mean less liquidity, which has been the main fuel for the rally in equities and commodities that started in March 2009.

Although an increase to 0.75% still is a very low rate, there is a gradual tightening in global liquidity and fiscal stimulus — which is not good for markets.

The Fed’s decision will probably end the relief rally that reached stiff resistance at the 1100 level and thus, a resumption of the correction downward.

The latter should further strengthen the dollar and negatively affect emerging markets or commodities for some time.

This trade should continue until the Fed once again is forced to implement quantitative easing measures to help the recovery of the U.S economy.

With rising rates, contracting credit in the private sector and high unemployment, it’s improbable that growth can be sustained if stimulus measures are removed.

Once the printing presses are back at full speed, emerging markets, commodities and gold will rule once again.

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VictorRiesco
During the last two weeks, the markets have staged a relief rally after a steep correction. The sharp move down from the January highs quickly brewed panic in market participants. On Thursday, Feb. 4, the down-to-up volume reached almost 36 to 1 on the NYSE Composite...
victor,riesco,fed,commodities
500
2010-31-19
 

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