Stock Market Analysis

Monday, July 25, 2011

US Debt Bear Trap...

The Dow retreated 88 points today as a wave of negativity swept across global markets on US debt problem.

Fundamentals
A wave of negativity swept across global markets today as news of US debt problem and the further downgrading of Greek debt ranted throughout the weekend over the media. Starting from Asia, every market opened and remained negative, leading to a deep negative opening in the US market. Indeed, these debt problems are the aftermath of the recent financial crisis and if not handled well, could jeopardize the current global recovery. There is always a period of "toxic clearing" within every recovery phase that could last as long as an entire year, before the real bull market starts. We saw that back in 2004 as well. The Chicago Fed National Activity Index released today also registered its worst level since Oct2009, adding to the negativity today. (The Chicago Fed Index is an index measuring economic activities and inflation on a national level by combining 85 different indicators. Positive number indicates growth above historical trend and negative number indicates growth below historical trend. See Stock Market Calendar.) However, there was clearly a significant level of bargain hunting in the morning session, which goes to show that there is no absence of optimism. This was also reflected in the bond yields rising across the board as investors take advantage of the bargain in the equities market. Indeed, such "debt news" driven drops have the potential to be just a one day affair.

Technicals
A pretty scary looking drop today which looks nothing more than a bear trap. Short term bullish momentum continues to rise on our short term indicators and there is no indication that this is going to be anything significant. As such, I would expect the market to come back up as quickly as tomorrow.

For now, the Dow remains in a short term neutral trend in an intermediate term neutral trend within a primary bull trend.
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