I mentioned before that there is no correlation between the markets and the economy. As matter of fact, when the Dow Jones was at 14,000 I wrote about how bad the economy actually was. It is easy to talk about a bad economy when things look bad, it is another story to do it when they look good and are bad.
Today we have an interesting situation. The economy looks bad and it is bad. However, it looks like we are going to have a rally on the markets.
This is a monthly chart of the Nasdaq futures
If you take a careful look at the last two candles, you will notice that the market is finding buyers at 1500 and not finding sellers there. Add to this that the Qs are hard to borrow, which means there are a lot of short sellers up there.
A wider picture will show you that those who entered the market before 2005, are still up and don’t have many reasons to sell here.
It is easy to see how 1500 is a level that is holding. Tomorrow we have the vote in the lower chamber of Congress and that may spark this rally. A rally that will be fueled by short sellers trying to cover their positions.
If you look at the picture of the beginning of 2007, you will notice why I call for at least a 3 month rally.
As you can see, after a steep decline, there was a bounce. It is hard to argue that the economy was better in March than it is today. That’s just the mechanics of the markets at work. When the efforts of the sellers failed three times, the sellers gave way to a new rally. However, that rally failed to break a new high, and we had a new decline.
Simple as playing good poker. If the odds are against you, you fold.
For the past two months the short sellers, and the scared investors have been selling the markets. With a barrage of bad news they were unable to break the 1500 mark on the Nasdaq futures. I would expect they use the opportunity of a bailout bill passing as a chance to fold their bets for this round.
If there is no catalyst to ignite a rally, however, we shall see a continuous decline because there will be no reason for buyers to enter the market or for sellers to stop selling or shorting the market. However, if there is a rally, oil will start rallying as well, most probably fueled by the “expectations of economic recovery”. The close of Oil futures today is 93.25 and I would expect a rally to at least 110.
Once again, I don’t think that a three month rally would say that the economy is on the path of recovery, but I would expect politicians would say it. After all, we are just one month away from the elections.
Place your bets on the markets, and place your bets on the election. But if you place your electoral bets based on this incoming rally, don’t complain when in January they take you to the cleaners.
Guess what. I even have an article about the timing of the “liquidity crisis”, announced the top of the Dow Jones and I even discussed how the new high of the Dow Jones back in October 2007 was just an illusion.
I am not suggesting any market strategy. Consult a financial advisor before making any financial decisions.
Full disclosure: I am short time long the Qs based on this analysis, but this is not financial advise. (Well, as if my readers were going to move the market).
Franklin @ October 3, 2008