The oversold condition is correcting with a rally that lacks any conviction or merit. Many sectors are still collapsing. LIBOR rates are around 7%, Fed Funds have climbed to 5% and now we’re seeing credit markets start to completely lock up from the top down. The Fed pumped nearly $700B in to the system, and it is still failing, showing that the bail out bill would do little to address the more than $5T in bad debt that’s buried in derivatives.
S&P 500 testing a key resistance level of 1150, which was our last tier of support yesterday before the market fell off a cliff. The dollar is showing some unprecedented strength against the Euro, GBP, Yen and Franc. Meanwhile, gold is correcting on the dollar strength. Perhaps the dollar rally is predicated on the notion that the bill vote failure is deflationary.
Bond yields are rising across the curve as investors put some capital back to work in the equity markets. Short term bonds are still yielding next to nothing as safety remains a high priority.
Energy markets bounce back after a vicious sell off, but oil has failed to successfully reclaim $100/barrel, while natural gas has found support at $7.
The bouyancy of equity markets entirely depends on continued injections of liquidity by central banks around the world. Coordinated global rate cuts may be the next step as I mentioned yesterday. Fed fund’s futures predict a 100% chance of a 25 basis point cut and a 25% chance of a 50 basis point cut for the October meeting, last I checked.
Conditions remain bleak and the path of least resistance remains to the downside. Be very careful trading this market. Normal market forces and logic have been surrendered as participants wait with baited breath for some kind of government intervention.
