THE VOICE OF TRADESTRONG MANAGEMENT

Saturday, August 27, 2011

Friday - August 26, 2011

For some unknown reason, investors and the markets not only breathed a sigh of relief, but went on a buying spree today, as the the major averages posted their first weekly gains since July. For the week, the Dow Jones Industrial Average was up +4.3%, S&P 500 Index rose +4.7%, and Nasdaq Composite Index tallied a +5.9% gain. The indices finished Friday near their session highs after getting hit for a 2% loss on the announcement out of Jackson Hole. In fact everything with the exception of the U.S. dollar and the Swiss Franc closed higher on the day. Bernanke did not launch any new extraordinary policies, but the markets took his comments, that the FOMC would consider additional measures at its September meeting, as a signal more easing might be on tap. However, ECB President Trichet is also speaking on Saturday, which is certainly just as important as Bernanke's speech today, and more likely to produce something more shocking.

While a sense of calm has certainly settled in after the ES held the 1120 area, and bounced back up to the 1185 break-even area for the longs, the lack of leadership in the market should be of great concern to the bulls. On the NYSE and on the Nasdaq exchange new 52-week lows totals still solidly outnumbered the new 52-week highs totals. A rally that is sustainable should be accompanied by stocks hitting new 52 week highs. There has been much talk about the fact that the market experienced a distribution day soon after Tuesday’s follow-through-day. Historically, when a distribution day occurs on the first or second day after a follow-through day, the "uptrend" reportedly has failed 95% of the time.

On a day when the appetite for risk appeared to have returned, the gold and bond markets both came roaring back today, and appear poised to trade higher, while crude oil showed relative weakness to equities, and the DAX seemed ready to make new lows. The VIX continues to remain in it’s uptrend, even though the market rallied from 1110-1188, and may be forming a bull pennant, adding further evidence of bearish divergences. Whether the continued high volatility is caused by a lack of liquidity, or uncertainty about rapidly changing market fundamentals, or the lack of liquidity is caused by the high volatility, this negative feedback loop is sure to continue off-and-on, unless the Volker Act is repealed and the handcuffs are removed from Wall Street’s banks.