If external events drive trend changes in financial markets, then the "road" of fundamental analysis would go in two simple directions: Bullish news would drive prices north, while prices would go south on bearish news. THE END
That, however, is not the case. In fact, the "fundamental" freeway has more twists and turns than a Midwestern corn maze.
Case in point: The recent about-face taken by the mainstream media regarding stocks and the banks' stress test. On May 9, the following results of the exam hit the world wide web-osphere: 10 of the nation's largest 19 financial institutions will have to raise $75 billion to cover their current debts to Uncle Sam.
As gargantuan as those numbers are, the usual data-crunchers expected far worse. So, when the Dow Jones Industrial Average ended the day 164 points HIGHER at its loftiest level in four months -- the experts didn't think twice. Obviously, it was the market's way of rejoicing in a "solvent" banking sector. To wit:
- "Wall Street Rises on Stress Test Relief." (Barron's)
- "Banks Exams Over, Wall Street Celebrating. The healing process has definitely begun." (New York Times)
- "Stress Test Results Boost Stocks. The market has taken the results and turned it into a positive thing. The more information investors get, the more they want to jump into the market." (Forbes)
Yet -- when the market re-opened on Monday May 11, investors jumped OUT of stocks like a cat from a cold-water bath. That day, the DJIA plunged 154 points.
True to inconsistent form, the fundamental experts cited the same exact Stress Test for the drop in stocks, as these May 11 news items reveal:
"Stocks 'Stressed' Out" (AP) --- and --- "Bank Worries Return To World Stock Markets" (Reuters) --- and ---"Stocks Fall On Bank's Capital Raising Plan." (CBS News)
Obviously, the financial firms weren't going to raise the $75 billion needed now, or the estimated $600-$950 billion they could need come 2010 -- through a bake sale. The 38-page government report on the banks' stress level explicitly states "asset sales and other forms of converting capital into common equity" as ways to shore up the necessary funds.
In the end, the fundamental explanation for market events comes up empty handed. On the other side of the fence, the May 9 Short Term Update put stocks to their own "stress" test. Our analysts measured the internal health of the rally based on several objective indicators; such as: Sentiment, wave structure, Fibonacci relationships, and more.
And, ALL signs pointed DOWN. In Short Term Update's own words:
"It is possible that an (A)-(B)-(C) pattern is drawing to an end, which should usher in a protracted pullback. We certainly are on high alert for evidence that wave (C) up is complete."
Find out whether this drop is the "suckers sell off" or the start of something larger.
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