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Fed Says Economy Is Toast.... Stock Market Shrugs It Off For Now...

Stock-Markets / Stock Markets 2010 Jul 15, 2010 - 02:41 AM GMT

By: Jack_Steiman

Stock-Markets

WOW!!!! Fed Bernanke came out and said the economy won't recover for five to six years. When did he suddenly get so enlightened?!! He didn't know that until now? He didn't see this coming? Seriously? He went from we're recovering just fine to five to six years. Good job commander!!! We're so proud of you.


The market took this news mostly in stride, although there was a quick swoon lower when it was first announced. It recovered by days end, but you have to wonder if five to six years really means ten to twenty years. I guess we'll only know the answer to that in time. A lot longer time than any of us had ever hoped would be the case, but it is what it is, I guess.

The bigger question is, what does Fed Bernanke's statement mean to all of us in the coming years? To me, it means extreme caution will be the way to play this game. If he is right and things go nowhere for a while, then we hit a bump in the road where earnings severely disappoint after we've worked off sentiment issues, the market could have some large problems down the road. It is unclear for now, but it does make one wonder as to what is waiting for this market in the not too distant future, say the next earnings cycle in October. Interesting times for all of us. Not necessarily good times, but clearly quite interesting times.

The market was up a bit at the open today, especially on the Nasdaq as the earnings report from Intel Corporation (INTC) last night gave the market a bid in to overbought 60-minute charts. With the market getting extremely overbought, the news from the Fed gave the market the necessary push down to bring those extremely overbought 60-minute chart oscillators lower. We went from near 80 on the RSI to the upper 50s. We should get lower than that, but you never know. A move in to the 40s or 30s would be a perfect tonic for the unwinding of the overbought conditions.

After the Fed brought the market lower, the market recovered enough to finish flat overall. The S&P 500 came down just a fraction, but the Nasdaq was up a bit and the Dow was also up by just a fraction on a percentage basis. Decent action as we are basically flat from yesterday's close. We have unwound the 60-minute charts quite decently, although not all the way. Good action for the bulls from a technical and fundamental perspective on the news from the Fed.

Now, let's talk about sentiment. Last week we saw the market go higher, and at that time we stood at a 2% bull-bear spread in terms of sentiment. 2% more bulls.

Even with last week's gains we managed to somehow improve those numbers in terms of it being favorable to the bulls. We are now inverted with the bears leading by 2%. A full 4% reversal lower in sentiment, even in an up market. This tells me that it's unlikely, although not impossible, for this market to fall in a sustainable fashion for the very near-term. Medium- and longer-term, once the sentiment reverses back up, we are in some trouble.

But I can't worry about it all. I can only focus on the message for the short-term. It says that there are simply too many bears in the trade already, and thus, we should try to head higher over time. How high is impossible to know because there is a fundamental equation being built in there. Earnings this season, which is now under way, will be telling in how high up we can possibly go for the short-term. We'll take that one day at a time. For now, there is no question that an inverted bull-bear spread is a huge plus for the bullish case.

The S&P 500 has yet to clear that all, too elusive, 1094 area with any force. It has tried, but has been doing so at very overbought 60-minute charts. This is making the job harder as it tells us that besides needing to unwind things, we are also dealing with the bears fighting at these levels. That combination isn't great. We need to unwind a bit further, and then it is quite reasonable to expect the bulls to get the job done, although we may visit 1075/1080 first.

Should we cleanly break above 1094, then we look at the recent high intra-day at 1131 for the next big resistance level. If we ever clear 1131, things will really open up for the bulls. For now, however, the bulls need to focus purely at 1094 and putting some space between it to the up side. The market is still tenuous for the bulls until we can blast through. Until we do, slow and easy with some long exposure is the way for now.

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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