Darshan's Blog

Darshan's Daily Market Ponderings

Tuesday 7th December, 2009

Bernanke Preparing Excuses Already?

Well well well,

Seems my post yesterday, warning about Friday's move in the US Dollar not being the real deal - proved to be very timely. (Same with the Yen). A good few hours after I put the post up, Bernanke spoke and of course, his bearish tone, especially warning that the US economy "is facing formidable headwinds...whilst inflation remains subdued", helped the dollar make it's way back down from the 76 level. However, considering how much he has been praising himself and been praised, since March - why is he suddenly saying all this?

It feels like the classic strategy to create excuses in advance, in case his policies do not work (and they won't). Remember, he has not been reappointed just yet - so he needs to create a picture, that absolves him of all blame. In reality his policies have caused the FED to be stuck in an awkward situation. Do they raise rates to battle any inflationary threat or do they keep the rates low for an extended period of time, to help the homeowners who are on adjustable rate mortgages? It's a fine line and the FED is walking on it. Remember, that Bernanke knows that there is a significant amount of homeowners who will be facing mortgage resets over the next two years. Any raises, are going to hit those homeowners hard, if their resets occur as rates increase. This in turn is going to hit consumer spending - which is a significant portion of the GDP. So does the FED save the homeowners or worry about the inflation issue? Personally, I just don't see the inflationary risk, as imminent - instead I see definite signs of further deflationary risk. Even more so, if these homeowners are hung out to dry.

It seems from Bernanke's words - he is saying the same thing and is pretty much preparing his reasons for not raising rates any time soon. In the short term, his comments are not helping equities either - as Friday's Labour market induced good feeling is fast evaporating. We are still trading in a boring range and I've lost count of the number of days in December, where 1100 on the SPX, has proved to be support. How long can that last, before support gives way? This sort of price action works both ways - either the bulls just give up or the bears just give up - either way, we get an explosive move one way or another. I for one cannot wait for this week to be over - as we will be in a better position to work out what the price wants to do. I am still thinking that we need to test the futures low from November 27th, before any serious move up. I am also thinking that, the move up arrives either this Friday or next week and we keep going into January, before we collapse hard and repeat what happened at the beginning of 2009.

Remember you have to think like the smart money. Are we at a level where there are more buy stops to hit or sell stops to hit? At the moment - a lot are long looking for the santa rally. So why not wipe out those sell stops and hence get rid of the weak longs...allowing the big money to buy lower...where a whole lot of bears will add to their shorts, thinking the high is in. This will allow a whole new batch of buy stops to be triggered and this is how we get our Santa rally - through short-covering. Sounds so simple right? Well if it works, then you might be able to get out of your longs right at the top of this bear market rally - and possibly even switch to the short-side and profit from the entire downside. 2010 is going to be an interesting year, that is for sure.

For now we have just got to be quick on the trigger and spot the opportunities. There is no significant economic news from the USA today, so the market should be boring yet again.

Stay safe and happy trading,

Darshan

*The information contained on this website and from any communication related to the author s blog is for information purposes only. The analysis and the market recap do not hold out as providing any financial, legal, investment, or other advice. In addition, no suggestion or advice is offered regarding the nature, profitability, suitability, sustainability of any particular trading practice or investment strategy. The materials on this website do not constitute offer or advice and you should not rely on the information here to make or refrain from making any decision or take or refrain from taking any action. It is up to the visitors to make their own decisions, or to consult with a registered professional financial advisor.