Bulls & Bears in a Scrum
Research for Online Investors

by John Dalt

9/29/11

The market spiked higher this morning on good news in the Weekly Jobless Claims numbers.  The market expected 420 thousand but was surprised with a drop to only 391 thousand new claims last week.  Continuing claims increased slightly.  GDP increased at a 1.3% rate, better than the expected 1.2%  The GDP price index was up at 2.5% indicating inflation pressure in the U.S. economy.  Economists expected a 2.4% number which was the same as last month.

Germany’s lower parliament approved the enhanced European Financial Stability Facility (EFSF) this morning.  The upper house will take up the measure on Friday.  Austria doesn’t vote on the plan until Monday.  Finland approved the plan, but is still negotiating for collateral on any new rescue packages.  Members of the True Finn party say the government will not participate in a new rescue for Greece without collateral.

The DJI was up 260 points this morning before we ran out of buyers (optimists).  10950 looks like the next area of support on the DJI.  This was the low on 9/06/11  This is weak support, but when the market is going down, you look for any chance to stop the fall.

We prefer to watch the S&P 500.  If you are short the market, relax until we get to 1120.  That is where the fireworks are going to start and the decisions become difficult.  We are still in a headline driven market.

Ben Bernanke, Chairman of the Federal Reserve, gave a speech and answered questions in Cleveland.  The Wall Street Journal has some quotes in an article this morning. Bernanke answered a question saying, “If inflation itself falls too low or inflation expectations fall too low, that would be something we’d have to respond to because we don’t want deflation.”  When I heard this at dark 30 this morning, I was almost ready to close my shorts and go long.

Then I had a cup of coffee to watch the 'game.'

For a moment, I thought we just saw a glimmer of QE3.  Unless we hear about an emergency meeting of the Federal Open Market Committee (FOMC) it ain’t going to happen yet.  So we will stay short.

One author I enjoy writes about the precious metals market.  His comments about Bernanke fighting deflation were succinct.  He said, Bernanke will drive busses over school kids to inflate the economy.  I laughed at his hyperbole, but recognized the truth in his statement.  Bernanke is a college professor and fancies himself a student of the Great Depression.  He believes the Federal Reserve can avert deflation by pumping money into the economy.  He even commented in a 2002 speech that deflation could be fought by dropping it out of helicopters.

Bottom line the farther the market falls, the worse it looks, the more likely we get a lifeline from the Federal Reserve.  And I think it is going to get a lot rougher, but the moral of the story is keep your eyes and ears open for headlines that change the game.

Back to 1120 on the S&P 500.  1120 or 1119 has acted as support four times since August 8th.  It has failed twice and the market fell to 1114 and 1101 respectively before reversing.  These will be the battle lines between the bulls and the bears.  It is kind of like a sporting event.

Quote:
This is a brutal market.  I am mostly cash with a couple of out of the money Dec. Puts.---Long-Term subscriber G.O.

John’s reply:  It seems there is no safety anywhere.  Make sure you have sell limits, they can move fat.  I think we are heading lower.  Don't despair, I saw yesterday that one of John Paulson's Hedge Funds is down over 34%  It will all come back quickly once we clear the rough patch.

Editor’s note: Welcome to the new Gulch members!

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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