Wednesday, March 28, 2007

The Greenspan Put

On Wednesday, Alan Greenspan went from loose cannon to economic revolutionary, as Bernanke crossed the line and capped his former boss during Congressional testimony.

Public takedowns are how martyrs are made, and recession hawks gained a new patron saint. If you'll recall, on Feb 27 the US awoke to learn Shanghai had tumbled 9% overnight. A few hours later, Greenspan popped off and said that each month away from the last US recession is just one month closer to the next one. He then laid 1-in-3 odds that 2007 is The Year, and the Dow dropped 416 points.

Based on today's action, something similar may happen by Friday (just kidding).

Seriously, the market took an undisputed technical hit on Wednesday as Bernanke did something that Greenspan rarely did: Bernanke told the truth in plain English. The "truth" is that -- all things equal -- the US economy still isn't weak enough to cut rates. Wall Street hated that, and so volume accelerated 9% as institutions dumped shares.

Even so, the exits were hardly crowded. Volume was still below average, and the IBD100 did no worse than the NASDAQ, shedding 0.8%. Even though 13 IBD100 stocks closed lower on higher trade, just 3 of those were true distribution days. Investors still aren't ready to sell their best stuff just yet.

Even so, what today's action says -- in plain English -- is that tonight the market's a riskier place. Does this mean we go lower tomorrow? As Buddhabob implies (in less than plain English - LOL): you just never know.

The Composite gapped to the 50-day, and then closed lower on higher trade. Not my favorite. Red ADX is climbing, OBV is under MA(20) and Money Flow is below 50. Time to be careful.

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The Banks want their raw material to be cheaper and the Fed isn't budging. The BKX closing below its 200-day is a bad sign.

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Ouch. So much for Dow Theory.

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Bernanke distanced himself from Greenspan's position and testified on Wednesday that recession risks are still remote. The bond market agreed and the curve healed another 1.09% today (that's a lot). The chart below is a 17-year chart of the Yield Curve. You can compare the year-long inversion in 2000 that preceded the 2001 recession, with the one we seem to be coming out of now. The current inversion is not as clean, as intense or as long. You can judge for yourself what this does or doesn't mean.

For the record, lots of pros say this sloppy inversion is the footprint of a supply and demand anomoly -- a tsunami of foreign money ("a savings glut") looking for a place to park itself. Whether it's that or the sign of a mild upcoming recession, only time will tell.

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I leave in the morning for 10-days. I should be able to check in, but most likely it'll be dk Lite.

Whether it's the indexes or the stocks in your portfolio, remember this: up or down, volume tells you if it means something or not.

See you from the road.



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