The market will amplify and spin every positive word Bernanke mentions in his up-coming speech. The current bounce is I think just noise, albeit with the volume way up, though some further upside may be possible in anticipation of the Chairman’s speech.
It is likely however that by the time Chairman Bernanke gives his speech, everything he has to say about watching liquidity closely, that the broad economy remains strong, and the Fed stands ready to do whatever is necessary to maintain functioning markets, will already be fully priced in equity markets.
What is remarkable is that some people actually think he will come out and say that the Fed will be cutting rates at the next meeting. He will not be saying anything close to that.
The Bernake speech risks are that his reassuring comments about the broad economy remaining firm, may be taken as a little head in the sand-ish, but more significantly what if the Chairman mentions that it is not the Fed’s job to hold equity markets up per se?
Basically by the time we get to this speech there will only be room for disappointment. Despite this the most likely price action is a sideways to firm market prior to the speech, and a bit of a jump immediately after as the market focuses on its wish list utterances. Then within a few hours to a few days there could be the re-establishment of bear trend pressures that prevail in a more sustained fashion that the secondary sell off we just witnessed.
The reasons for this *upcoming third phase sell off* will be that all the bargain hunters will have largely finished their buying, that large funds waiting for better levels to exit some stocks will be hitting the sell button in the days after the speech, and that a continuing steady stream of bad news stories on losses by funds and banks, as well as increasing anecdotal evidence of a savage housing slow down taking hold along with an immediate slow down in consumer purchases, simply swamp the headlines.
For the moment today and tomorrow, equity markets should maintain a bid tone.
The US dollar sell off begins, perhaps but volatility remains the dominant theme here. People simply aren’t willing to hold any position at the moment. The market all rushes to one side of the boat then back as they square up again. In price we are back where we were two days ago. The overall scenarios remain the same, bullish Yen, bearish USD, cautious AUD before resuming major up-trend.
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