“Show me the money!” is the perfect slogan for me at this moment. Chatter is rife that the Federal Reserve and the European Central Bank may be about to intervene heavily in the markets in order to fight the crisis. Stocks have rallied strongly in anticipation since Friday 15 June. For me, though, rumours of another massive liquidity injection just ain’t good enough. I want the central banks to “show me the money.”
Nasdaq gaps higher
Unfortunately, Ben Bernanke and Mario Draghi aren’t anything like as pliant as Jerry Maguire. It is they who decide when the time is right to flash the cash, not financial markets. I have got burnt more than once by going long of the stock market ahead of some Fed or ECB announcement at which some massive intervention was supposedly going to be unveiled, only for the central bankers not to play ball.
The rally in equities has been especially impressive in the US indices. At one point on Tuesday, the tech-heavy Nasdaq 100 was up by 4.6 per cent from its lows of late last week. It began that session some way above its highs of the previous day, thereby creating a gap on the chart, which it often does in the early stages of strong up-moves. The Nasdaq, S&P, and Dow have all got back above their 55-day exponential averages, a line that I use to determine whether to be bullish or bearish.
S&P: 2011 redux?
The action is somewhat reminiscent of the move that we got almost exactly this time last year. In 2011, the S&P fell 8.2 per cent from its May peak into mid-June. It then bounced 7.8 per cent in less than half the time it had taken to go down. Thereafter, the real selling began. In 2012, the S&P shed 10.9 per cent from its April peak to its June low, but has since gained 7.6 per cent. Could the outcome be the same, with another dramatic decline to come?
Dow: bust, boom, then...?
It would certainly fit the bill were this to happen. The Fed’s last big move – Operation Twist, in late September – only arrived once the S&P had fallen by 15 per cent and when the economic and financial situation were even more dire than they were today. I do not think collapse is inevitable absent a giant policy initiative today. I merely think the upside will be limited in that scenario, but potentially still worth trading. I have no problem with the idea of the S&P heading back above 1400 or the FTSE nearing 6000.
Gold: summers of love
Talking of symmetry with previous years, gold has begun a major rally in each of the last three Julys. I continue to believe that the yellow metal is due to experience another strong and lasting move upwards, taking it back to and through its record highs at $1,926. Like the indices, it has now got above my key 'line in the sand,' albeit not that convincingly so. Once traders get a glimpse of the next round of central bank cash, this should change quickly, though.
