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VIDEOBulls Winning Heated Tug of War Battle
By
Ron Coby
Aug 02, 2010 9:50 am
But also be prepared for a bear victory because whichever side does win is going to win big.
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July was a fantastic month for equities. The first day of July started off in a panic but then it ended up being the best month since July 2009. When the market was down 300 points on that day, fear was incredibly high and the bears had the upper hand. However, every time the market was close to falling off the cliff it seemed like an invisible hand was there to save the day. This was one of the reasons we covered our last shorts on that panic day in the Grail ETF & Equity investor program. Since the July 2 low, the bulls have been winning this ongoing tug of war. Since we made the "sell all stocks" call on April 30, there have been nine panic up buying days and 11 panic down selling days. This incredible tug of war between the bulls and the bears isn’t over yet.
The bulls have a great advantage here because they have the Fed on their side, which is a powerful tug in their favor. The crisis in Europe was at first an advantage for the bears and that sent stocks reeling in June. However, that bad news has turned into and advantage for the bulls because Ben Bernanke has made it clear that he'll now keep rates low for an even more “extended period of time.” Bernanke also told Congress that he'll reintroduce all liquidity programs if the market goes into any type of renewed panic. They don’t call him “helicopter Ben” for nothing and you know the old saying on Wall Street, “Never fight the Fed”.
I certainly don’t want to give Bernanke too much credit here because something more bullish is going on that I've heard or read very little about. Stock buybacks along with mergers and acquisitions appear to be on the rise. The “June swoon” must have been viewed as a great buying opportunity to corporate America as they're buying stocks. This will give the bulls good reason to hope that businesses are gaining strength and the job market will finally begin to improve. It appears that these stock buybacks and mergers have really helped make July a great recovery month for stocks. Stocks with recent buybacks include (General Mills (GIS), Hasbro (HAS), Walmart (WMT), Cablevision (CVC), and Kroger (KR).
It was in my daily graph chart books last month that I noticed quite a few takeouts and stock buyback announcements. On a very quick count, there were about 23 companies in my NASDAQ charts and about 14 in my NYSE chart book that were taking out. I also counted about 65 company headlines that had the words “to acquire” or “acquired” in the NYSE chart book as well. Also in the NYSE book, I quickly counted about 56 headlines with stock buybacks as their most recent news announcement. My eyes simply hurt too much from squinting to count how many buyback headlines there were in the NASDAQ chart books. This is great news for the bulls and I'll be fleshing this story out more next week for our Minyanville Grail ETF & Equity subscribers.
The bears got some strength in their battle with the bulls from all kinds of economic data that showed the economy is still fragile and quite possibly weakening. Housing is still in its depression as foreclosures continue to mount. Growth in GDP is slowing considerably and the consumer is showing new signs of slowing down. Bond market traders are certainly on the bears’ side as yields on the two-year Treasury note tumbled to an all-time low on 0.56%. Such low rates reinforce the bearish case that the economy is ready to head into another deflationary death spiral. All of this is encouraging bears to believe that they will win this tug of war. The reversal after the double top on July 27 is encouraging for the bears but the inverse head-and-shoulders bottom is also encouraging for bulls. What a tug of war this is, but the big question is which side will win?
So what does all this volatility mean? It means that emotions are running very hot right now. Traders are extremely nervous about the market crashing but they're equally nervous about missing the next big rally. The bullish traders see a recovering economy and the recent economic weakness as a “pause to refresh.” The bears see deflation gaining the upper hand again and the prospects of a double-dip recession or even a depression. This tug of war between the bulls and the bears has placed our key trend indicator into what we call a state of “compression.” This compression looks very much like December 2007 before the collapse in 2008. It also looks like the compression setup in November 2005 right before the 2006 bull market run. The eventual resolution of this compression could go in either direction.
In summary, I'm truly hoping for the best; that volatility subsides and a solid base gets put in here so the market can have a sustained advance. Any upside breakout for the market will be a very good indication that the real estate depression is slowly going to heal. It will give us even more reasons to hope that businesses are gaining strength and the job market is finally beginning to improve. We have all heard market analysts lamenting the “lost decade” for America stock markets. More troubling are the horror stories we hear about lost fortunes and lost homes. For most of us, these past few years have been unlike anything we've ever witnessed in our lifetimes. But, you must be agnostic and disciplined in your approach to the markets. You can root for the bulls but you must be prepared if the bears ultimately win. Stay cool, stay calm, but especially get prepared; because an exciting move is about to take place as one side is soon going to win and they're going to win big.
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No positions in stocks mentioned.
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