Monday, July 11, 2011

What the bulls need to do

Sorry the postings have been light because I have been traveling. Looking at the markets, it appears that we have seen the relief rally, which I talked about on June 22. My favorite overbought/oversold indicator shows that the market has strongly rebounded from an oversold condition and these rallies typically last 1-3 weeks.

US equities saw a setback on Friday because of the ugly jobs picture. As a ray of hope for the bulls, Warren Buffett was talking bullishly about the employment situation and Berkshire was reported to have added $4b of equities to its portfolio.

However, Buffett has always said that he is not good at market timing. Near term, I continued to be concerned. Here are the things that I want to see the bulls achieve in the next few weeks before a bullish impulse can be confirmed.

First of all, the banks continue to act badly relative to the market. I would like to see the Banks show some sustained strength compared to the general market. The continued underperformance of the banking sector is an indication that the markets are still concerned about systemic risk in the financial system.

Second, I would like to see some signs that the Greek contagion has been arrested in Europe. In the wake of Italian bond yields blowing out Friday, an emergency meeting has been called on for Monday to deal with the Italian situation.

Lastly, equities need to decisively rally through resistance, as represented by the May highs.

Until those conditions occur, I interpret the current conditions as a range bound market.

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