Economic Review

6/01/2010

So where did that almost 300 point gain last week in the Dow Jones come from? And if it was magic, can the magicians pull it off again?

After a number of drastic declines in the major US Equity indexes, as news from Greece and the EURO Zone continued to paint a chaotic picture, along came last Thursday when the Dow, S&P and NASDAQ all traded exuberantly higher. So where did this glimmer of hope come from amidst all the recent doom and gloom. Well before you get excited about some potential GoldiLocks explanation of a rosy economic scenario that is about to blossom, realty is that one of the major factors that propelled prices higher was the same pathetic Las Vegas gambling underpinning that has reeked havoc on this market and soiled its credibility.

One of the factors that propelled stocks higher and got bulls excited was the breach of an important short term chart point for the Dow and S&P. The Dow level came in at about 10,190 and the S&P about 1090. Once price action took these levels out, bullish technical speculators took control sending the major indexes up nearly 3% late last week. The problem with this scenario is that trading on technical indicators without sound fundamental support is simply like rolling the dice and betting prices go in a particular direction for no sustainable reason. This is kind of like why Stocks rallied to their historic highs back in 2007 with momentum and technical traders riding the bubble market. Technical indicators looked good but fundamentals were a house of cards and eventually the market corrected.

Stocks responded to Thursday’s exuberance with a sharp sell-off and prices on the Dow and S&P settled right on top of major support of the short term chart point that propelled stocks higher the previous session. The question now is….can Las Vegas gambling be strong enough to have chart points dictate market direction over the coming days or will the truly negative fundamentals squelch the short term exuberance…..If stocks slide much more from current levels those Las Vegas gamblers may just get squeezed.

Stephan Kudyba (MBA, PhD) THE MARKET DOCTOR

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