Monday, April 16, 2012

More dead-cat bounce short-covering as the range trading continues

The yo-yo trend continues. The sharp decline on Friday sucked in a bunch more bears and now traders are showing them a little short squeeze, giving us another dead-cat bounce. Even Wall Street firms are confused as to where they think the market is headed, with Goldman Sachs "liking stocks" and Morgan Stanley "seeing risk", but that may be the classic story of selling the customer one story and collecting the fees and a short while later changing the story and collecting the fees a second time as the customer exits from what they thought had been a sure thing.
 
There are certainly a lot of variables up in the air. I do see the market on a slow upwards trend for the longer term, but that is independent of where the short-term and intermediate trends will head, each of which is themselves independent. The federal budget balancing early next year is a huge uncertainty with a significant risk of throwing the economy into a recession, coupled with the lingering risk of a modest recession in the coming months. The economy is still growing at a slow enough pace and with enough volatility that even a modest dip can end up being recessionary. Personally, I don't see that as a huge risk, but ECRI is still adamant about it.
 
The two key questions for investors are whether the short-term trend will break below the near-term low from the middle of last week, or break out from the recent peak for the Dow. They are probably equal probability events over the next month or so. Meanwhile range-trading is the rule.

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