Stocks rally on “bad bank” optimism

I haven’t updated in several days as there hasn’t been much new to talk about. The stock indexes seem to be caught in a range. Commodities look like they are trying to perk up. It seems obvious that there should be wild inflation just around the corner due to all the money the fed is pumping into the system. What seems obvious is usually wrong. Maybe if the economy spirals down into a deep depression all the money pumping won’t keep prices up. The gold bugs (and I am one) keep reminding us what happened to gold in the last depression. What they don’t make clear is that the big run up that they refer to was really in Homestake Mining stock, and not the price of gold, which was confiscated and fixed in price. I can’t see how commodities can rise in a deflationary environment. But gold could get a run for now based on a general exit from paper currencies.
But on to today’s market, the bad bank news lifted the deeply oversold financial sector, and that lifted the general market. This bad bank business reminds me of a well known commodity trader several years ago who compiled an impressive track record that enabled him to sell many books and seminars. It was speculated, and reportedly confirmed by those on the inside, that how he compiled this record was to have the broker jounrnal the winning trades into one account, and then put most of the losing trades into another account. And of course the winning account was used as the track record. I’m not absolutely sure this is accurate, but I’ve heard it from many reliable sources over the years. There is more regulation now that would make this difficult to pull off, but apparently not so for the government when it can work in its favor. So it looks like bad loans go in one account, and good loans in another. What logic……
But before getting all excited about this great rally in the financials, one must look at the bigger picture. The above left chart is of the S&P financial sector etf. It is a weekly chart showing its persistent downtrend, lasting over a year. It is certainly oversold and probably due for a dead cat bounce. There have been many over the last year, but ultimately the downtrend tends to resume.
The gold etf chart to the right is an update of the weekly chart I posted a couple of weeks ago (the previous gold post was of the daily chart). The regression channel shows several points of resistance that was finally taken out last week. Early this week that up thrust was extended a bit, but has since pulled back to retest the breakout line. These throwbacks are normal, and if the test hold it could be quite bullish later on. For now the momentum indicator is in the overbought zone, so would like to see that pull back. There is also some overhead resistance at each of the pivot highs on the chart. If price should pull back into the channel, it would be nice to see prices hold into the body of that candle a couple of bars back. There is a rejection tail, as the open and close of that week were close together, and prices pushed down only to reverse back up and close near the high for the week. This candle would be a hammer if it had occured at the end of a downtrend instead of a mild pullback after a several week rally. So not really sure what to call that candle, but whatever it is called, it still implies price rejection of the lows, so any retest into that area should hold if the uptrend it to stay intact. A violation of the low of that candle would obviously not be good for the bull case.

2 thoughts on “Stocks rally on “bad bank” optimism

  1. During the depression the price of gold was not exactly fixed. FDR actually raised the price to help reflate the economy. As a result, Homestake was one of the few companies that had a guaranteed buyer, the government, for its product and was getting higher prices as well. That is why the stock price soared, Homestake’s earnings went up while almost every other corporation’s were going down. An astute observer will note that situation has no relation to today since then gold was tied to the dollar while now it trades freely; unless of course you believe the GATA cranks.

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