Weekend at Bernanke’s 2

A pair of losers try to pretend that their murdered employer is really alive, but the murderer is out to "finish him off”. No, the losers are not Andrew McCarthy and Jonathon Silverman; they are Ben Bernanke and Barak Obama. And it’s not a corpse they are propping up, but a lifeless and morbid economy that is about to finish off the markets and what’s left of America’s wealth.

The original “Bernie “ film, although premised on a  ludicrous story line, was actually funny and a box office success. As with Bernie 1,  QE1 was "successful". It created artificially low interest rates and along with the fiscal stimulus, it enabled and forced capital to flow toward riskier assets. With risk mitigated by an acknowledged Fed put and a low yield environment that offered minimal returns on safer assets, the market responded with a 83% rally in the SPX off the March 2009 lows.

However, QE2 the sequel, appears destined for box office failure. While the original “solution” may have propped up the market the first time around, investors don’t seem to be buying into the story this time around. In spite of record low yields in the bond market, investors are staying away from risky assets, and are hunkered down in the perceived safety of treasuries, commodities, and gold. 

Investors realize the current “recovery” is unsustainable. While the U.S. and the rest of the world markets have experienced a bounce, industrial countries remain below pre-crisis levels of GDP, wealth, and employment. The bounce has not translated into the type of job creation and corporate investment, we would normally see during an economic recovery.

The U.S. economy is still experiencing low to medium growth, and deteriorated public finances, and is now going to be facing greater government regulation and higher taxes. Consumer confidence is abysmal along with the the housing market, and the money supply continues to shrink, leaving both the domestic and global economies  vulnerable to more  financial instability.

It is under this context that the market rallied Friday, following Dr. Bernanke’s speech in Jackson Hole. However, there are a confluence of technical indicators that suggest this rally may be as short lived as all the other rally attempts of late.

There is a downside gap overhead in the SPX that is filled at 1067.08, along with the 9MA at that same level, which provides the closest level of resistance, and a multitude of other factors that  lead to a high probability  of  the market trading lower, which Rennie Yang discusses on his “ Market Tells” site. I am planning on coverings my longs from Friday afternoon at 1073.25 against the R1 pivot on Sunday evening, and waiting to reassess the market tomorrow morning.