Bull trap

Friday, April 22, 2005

What a coincidence. The day after the Dow touched the incredibly important psychological 10,000 points level for a second or so, almighty Fed chairman Alan Greenspan had some reassuring words for a weary investor crowd. The economy still "appears to be expanding at a reasonably good pace", he said, was all it needed to send the Dow 206 points skyward. Sure, a continuation of the string of good earnings reports we have seen this week, the better than expected Philadelphia Fed survey and lower than expected jobless claims delivered some fundamental support in an increasingly volatile market.
The crowd on Wall Street's share market was cheering so loud that they therefore seem to have overheard his more cautious remarks that "the federal budget is on an unsustainable path," in which ongoing large deficits will inevitably lead to higher interest rates in order to keep foreigners supporting Bush's spending spree. Bond traders though picked up this far more important quote and sent bond prices tumbling downwards. The yield on the benchmark 10-year soared 9 basis points to 4.30 percent.
While the share market based its upturn on facts from the very recent past and neglected the fact that wages and salaries stayed flat in the first quarter, deducting 3 percent inflation from a 3 percent nominal gain, bond market participants looked forward and took notice of the 0.4 percent decline of the index leading indicators. 8 of its 10 components came in lower than a month ago.
With crude oil returning to price levels above 54 $ and therewith closing in on the average price in March of 54.63 dollars there are simply too many downward pointing factors as to assume that today's share rally could be sustainable.
Add Greenspan's worries about the aging baby-boomers and the resulting rise in retirement benefits which are more than likely to slow economic growth in the years to come, and we have all prerequisites in place to call todays stock surge in hindsight a daytripper on Wall Street. But a lot of shorts will have been squeezed out anyway by the 2 percent advance. The proverb that a bear market loves to feed itself on both bulls and bears gains credibility by such a strong move. It resembles last weeks relief rally after the publication of the latest FOMC minutes that didn't last longer than 17 hours.
Lawmakers will most likely again ignore Greenspans repeated pleas to finally get serious about trimming the budget deficit. Well, septuagenarians don't really have to worry about future budgets that will have to set aside an ever growing part of tax incomes for interest payments on debts generated now. But the rest of the country?
Paul Volckers concerns are still ringing in my ear. The longer the party keeps going, the worse the hangover will be.
Hanging on to the belief that the market is always right, whatever market participants wishes are, take note of the S&P 500 chart. Even after today's rally it is still below the former key support at 1163 points which has now turned into a resistance level. An absence of economic data will leave the market on Friday to itself. Its behaviour before the weekend will show how much confidence is really out there. I would not bet on the long side.


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