Note: Gold and oil prices in above chart reflect the evening session
One of the most frequently asked questions I have received since the beginning of our Domestic Sell Signal, which was effective 8/9/11, is why I don’t recommend using inverse ETFs, such as SH for the S&P 500, to take advantage of bear market conditions.
My answer is always the same. It looks like a good idea on the surface when reviewing charts of past bear markets. However, what you don’t see is the tremendous volatility that comes with bear markets via sudden reversal days and sharp up moves, which make this a proposition for only those with an aggressive risk profile.
Today was typical for that type of bear market behavior as the Dow swung within a 400 point range, while the S&P 500 vacillated within 49 points.
If you were short the market, you would have been pleasantly surprised to see the opening 2% drop for the major market ETFs, only to be dumbfounded by an astonishing reversal during the last hour, which would have you question the wisdom of your choice to be short the market.
Such is life below the long term trend line, while the bears are in charge. This could be nothing but a bounce of the bottom, as the major indexes approached Wall Street’s definition of a bear market: 20% off the recent peak.
Contributing to the last hour surge were reports that European finance ministers were involved in planning a way to recapitalize the various troubled banks, especially in view of the recent reports about Dexia, the French-Belgian bank with big exposure to Greece.
Helping matters initially were comments by chairman Bernanke that the Fed is ready to throw an assist to the global financial system. Enthusiasm faded, however, as he elaborated on the dour economic outlook.
From my viewpoint, the markets were oversold and due for a rebound anyway. While the recapitalization talks of European banks provided the fuel for today’s comeback, it’s questionable if anything worthwhile will come from it other than a band aid approach.
We’ve heard too much jawboning in the past with not much of a result, so why should this be different? European politicians excel at incredibly lengthy talks, but rarely will somebody step up and make the real hard decisions that need to be made in order to solve a problem now; it’s so much easier to kick the can down the road.
Still, it was a nice rebound with the S&P 500 now bouncing against overhead resistance. We remain in bear market territory with our Domestic TTI (Trend Tracking Index) hovering -1.06% below the line, while the International TTI recovered a bit, but is still stuck deep in the bearish zone by -14.20%.
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Comments 4
Ulli, You’re exactly right. The Europeans have been jawboning this Greece thing to death. The Eurozone does not have a central bank, and no bank or group of banks are willing to sign on the dotted line, for responsibility of bailing out Greece, if Greece defaults. Greece government workers do not want to get laid off nor take pay cuts, and they will fight this with every ounce in their bodies. The Greece government is very reluctant to make the big changes it would have to make to make Greece’s debt shrink and get paid off.
As for our Fed, I guarantee you, our Fed is not going to do anything for the Europeans. It has more than its hands full, here, in America. Also, to hold out the possibility that the Fed will take action, here, is baloney. They have used all of their bullets. Our Congress can’t even agree whether or not our government will stay open or close, much less to give the Fed more money to throw at the economy. Bernanke’s comments were correct, though, that the government should not cut spending, during a recession (which I think we are in, right now), but Congress and the President are not in the mood, at all, not to cut spending. They want re-elected, and they think they have to cut spending to get re-elected. What a mess!
JC,
I agree with all you said. However, I think the Fed will intervene if only to protect the interest of any affected American financial institutions.
Ulli…
Hi Ulli,
Thanks so much for your insightful commentary. I’d like your thoughts on the very fast move up late in the session yesterday. To me it was awfully reminiscent of the “Flash Crash” last year. I find it hard to believe that this very fast move was entirely due to European events and/or short covering. I’m suspicious that it may have once again been caused by algorithms gone wild or something related to high frequency trading. Frankly, it has me a little rattled re: having confidence in the market as a fair trading system. Any comments?
Thanks much!
Bob,
Sure, there is manipulation going on, but we won’t know until it’s discovered and published. To avoid getting stuck in a scenario like the “Flash Crash,” be sure to never enter your sell stops ahead of time. I posted about that here:
https://theetfbully.com/2009/10/front-runners/
Ulli…