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Economic Review

7/20/2009

So what’s driving this recent Equity exuberance?  Something called summer markets.

If you have been following the Doc’s material over the past few weeks, you would have known that we ceased posting the daily write-ups for the next month or so because of something called summer markets.  This notion refers to the fact that thin volume days can produce huge price swings in markets with the absence of solid fundamental news.  This type of market can also render technical indicators as not reliable.

The last week of US Stock price action is case in point.  The major Indexes, after suffering double digit losses, turned on a dime to post almost double digit gains.  When the major Indexes were at their weaker low points (prior to last week’s rally), technical objectives pointed to much lower price levels, which caused speculators to initiate aggressive short positions.  However, just prior to Goldman Sachs posting their incredible earnings, the market turned.  The upside action gained momentum as Intel and IBM added to the positive earnings news.  The result was a massive squeeze of speculative shorts as traders needed to cover their positions in reaction to the positive price action and hence an aggressive up-move for the major Indexes.

One major problem to this scenario barring the Goldman news (which was quite interesting given all the artificial activity transpiring in the US Fixed Income market) was that the Intel and IBM good news was more the function of cost cutting and not top line revenue growth (hence, no reason for any Stock exuberance).  What you had was summer markets that negated bearish technicals and caught the market short.

In case you thought that the economy was recovering because of this stock activity, try to catch an excellent piece by CNBC, titled The House of Cards.  It is an excellent documentary that describes what really happened to the US economy over the past five to six years. The only weak part of the show was interviews with Greenspan who is seen saying that the Fed couldn’t do anything about the bubble.  That assertion is simply nonsense.

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