Yesterday’s rally saw global markets run 2-3% to the upside. The move in the US erased last week’s NFP driven losses.

Technically, the internals will tell whether this is a dead cat bounce or the start of something more lasting.

The rally clearly is not fundamentally driven — stocks are fairly valued, but have been so for many quarters.Earnings remain robust though this upcoming quarter may be a challenge.

What I find disconcerting is the under lying drivers of the rally. We were deeply oversold for sure, and that typically sets up the environment for a strong move upwards. However, yesterday’s screamer was lit by European central bankers suggesting they will eventually get around to dealing with Spain. The WSJ reported Ben Bernanke stands ready to help the US economy is needed. And this morning’s flat futures got a big pop move when China’s central bank announced a 1/4 point rate cut.

Its interesting how these bankers manage to say these things at moments of markets being enormously oversold, raising the philosophical question: Is the sentiment or the headlines driving markets? I suspect its the former, not the latter.

The environment is especially challenging. You cannot merely close your eyes, hold your nose and buy ‘em, and you sure as hell don’t want to be short ‘em. But it is less than ideal for investors to be depending upon the kindness of global central bankers for their returns.

These are interesting times . . .

Category: Markets

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19 Responses to “Oversold Intervention: Markets Stay in Rally Mode”

  1. rktbrkr says:

    Its interesting how these bankers manage to say these at moments of markets being enormously oversold, raising the philosophical question

    Are the central bankers “managing” securities markets, so much for free markets. As the Fed spokesman so eloquently stated a while back “we want high assets prices” . Full employment for the 99% may be out of their control but not high asset prices for the 1%.

  2. globalmacrospeculator says:

    IMO, over the past couple weeks, (except for last Friday) the main driver of risk off was the fear of a Spanish banking collapse. 100bn left the country in the 1st 3 months of the year, or 10% of GDP. I don’t think it was really worries of a US recession.

    Yesterday’s news/rumors that Germany would be open to a Spanish banking recapitalization from EU funds was a large catalyst for the global rally. IMO, the reduction in (the perceived) risk of a Spanish bank collapse means markets can probably reprice upwards a bit – from ‘crap EU banks are goners’ to ‘ok now we just have to price in an extended recession in Europe and a continued slowdown in the US’

    FWIW.

  3. Chief Tomahawk says:

    What’s wrong with depending on ‘global central bankers’? Surely they’re straight shooters, right?

  4. Woj says:

    @rktbrkr, it does appear the central banks are becoming increasingly concerned with asset (namely stock) prices. Given all the research on how minute wealth effects are, I’m not sure I fully understand the shift. Regardless, the central banks expected actions are basically driving markets these days. Some day the market may realize that CB easing has done relatively little for gdp and profit growth, but that day is clearly not today.

  5. Concerned Neighbour says:

    Looks like we’re rallying another 30% straight up again (ala last October) before the so-called markets become overbought again… why not with all the tremendous values around…

  6. sditulli says:

    You have this wrong. The central bank can drive NGDP. NGDP drives the equity market provided that inflation stays below roughly 4% and the rest of growth in real growth.

    As a market participant it is your job to figure out the reaction function of central bankers and figure out where they step in.

  7. dead hobo says:

    I’m sticking to plan and waiting for the Greek elections and the Fed meeting. I suspect the Greeks will disappoint, but be ambiguous about it, and the Fed will say no QE is needed. BB might even say that in his Congressional meeting.

    China’s rate change almost got my to buy in, but then I would be chasing a rally and this has frequently been a problem for me. I’m trying to break a habit. In the past, had I waited a few days, I would have gotten a much better price. Plus, 1/4 point isn’t much. It just sets a nice tone.

    The ECB made no great pronouncement yesterday. They stated that the governments need to do more, they planned no changed at this time, but would act later if things got really bad. That’s as generic as it gets and does not favor more liquidity being added without a much better reason than currently exists. Europe will think about planning meetings in the coming weeks and use press releases of these possible distant meetings as action substitutes. Rumors about Germany becoming a welfare nanny also assisted yesterday and will be common for a while, I suspect.

    As I wrote earlier, 30 days is an eternity in this market. Real people aren’t buying stocks. Funds with OPM and algos are doing it. On the other hand, the commodity blow out caused a lot of this crash and these prices are down for now. Greece is the last shoe to fall with the Fed stating no further QE for no good reason. I plan to approach this more like an investor and not like an excited day trader. I need a set and forget time horizon.

  8. Petey Wheatstraw says:

    “Is the sentiment or the headlines driving markets?”

    You already answered that question, BR: It’s central bank intervention/monetary policy that’s driving markets. Make no mistake: If any of the central banks move to tighten credit/or cut stimulus, at this point, the whole system will lock up.

    Anyway, even if it was sentiment or headlines, neither would do a damned thing to fundamentally change the situation.

    Sentiment and headlines resulted in the Facebook IPO.

    I also find all of this disconcerting — in the same way that water leaking into a submarine might be.

  9. FMT says:

    My 2cents:

    “Is the sentiment or the headlines driving markets?”

    The sentiment (& market position) is the cause of the move.
    The headline is the catalyst for the move.

  10. Mike in Nola says:

    BR: F’in A, Bubba.

  11. [...] important to recognize, as Barry Ritholtz noted this morning, that this so far two-day rally has not been on the back of fundamentals but due [...]

  12. “…The central bank can drive NGDP…”

    that reminds of an infamous Phrase–wrought in Cast Iron–found over a Gate..

    ~~

    “…Given all the research on how minute wealth effects are, I’m not sure I fully understand the shift…”

    the CBs are Political Creatures, their, most, influential Constituents are highly levered to ‘Asset Prices’..

    also, said ‘Research’, while *popular in some spheres, is, hardly ‘Mainstream’..

    and, as it takes its Time–to trickle down the mountainside, they ‘Asset Prices’ are wonderfully distracting conceit..(for a decent Treatment, of that Idea, see Vonnegut, in “Slaughterhouse Five”) ..

    http://search.yippy.com/search?query=Vonnegut+Ticker+Tape+in+the+Zoo&tb=sitesearch-all&v%3Aproject=clusty

    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus-ns-aaf&v%3Aproject=clusty&query=Arbeit+macht+Frei

  13. jib10 says:

    @Woj – While the wealth effect has very little impact on the economy as a whole, it has a huge impact on the economy of the 1%. Wall Street is where the wealthy store their excess capital. Unemployment which affects the working class and middle class, sorry, the Fed would like to help but you know, inflation and all that. Housing which affects the middle class, sorry, not much we can do old man, really would like to but it is out of our hands. But let stock prices drop. OMG!!!! Here is signed check, you just fill out the amount.

    Think I am overstating it? Then explain how come all the brainiac talking heads go nuts when the Fed thinks about helping unemployment, which is actually a legislated mandate of the Fed but never complain one bit when the Fed gooses equity prices, which the Fed should never, ever be involved in. Surely it can not be as simple as those brainiacs have jobs so they dont care about unemployment but they do own stock and do care about equity prices.

    Nahhh, thats not it.

  14. Woj says:

    @sditulli, central bank cannot set NGDP unless you ignore the role of private credit

    @dead hobo, thats a difficult habit to break but well worth the effort. the rallies have tended to reverse far quicker than most expect. the political environment is more of a headwind for central banks than in previous years.

    @Mark E Hoffer, good follow up and thanks for the links. This is from a couple months back on Fed’s Treasury Purchases Now About Asset Prices, Not Interest Rates (http://bubblesandbusts.blogspot.com/2012/04/feds-treasury-purchases-now-about-asset.html). But hey, maybe it’s always been that way?

  15. Woj says:

    @jib10, Definitely don’t think you’re overstating the case and frankly am sympathetic to that view. I guess I’d like to believe the academics among the Fed have not been completely consumed by the political/Wall Street expectations (maybe that’s optimistic?).

  16. AlaskanPete says:

    “Is the sentiment or the headlines driving markets? ”

    Why does it have to be one or the other? This isn’t a binary choice. Some of both.

    In any case, I find it amusing that we repeatedly hear “China is slowing!”, where “slowing” means the rate of growth is lower but still significantly positive. When the second largest economy is still growing gangbusters, and can continue to do so until hitting resource constraints (given their state directed economy), forgive me if I’m unimpressed with the “china is slowing” thesis.

  17. Winston Munn says:

    Ben Bernanke stands ready to help the U.S. economy as needed – goosing the price of gold is considered economic help? Who knew?

  18. kek says:

    Is the sentiment or the headlines driving markets? uh, yeah, always have. The percentage of market participants that currently practice at the alter of headline speculation driving their money management decisions has to be higher than ever. (thank you useless digital age information over stimulation).

  19. bear_in_mind says:

    @DeadHobo: I’m with you. Looking for entry points for longer-term positions and striving to separate out the ‘sturm and drang’ in the week-to-week and month-to-month action. I have a non-financial career and can’t stare at every market twitch and swing. Expecting more good buying opportunities before October; then again when the next recession eventually rolls ashore.