Market makers again take profit on a falling market. Although the short positions are covered, market makers may still make opportunity from another market drop as in the last two cases, a slow decline and a quick drop. It would be difficult to forecast the strategy of market makers' next move.
As market is highly manipulative, short term movement is very difficult to predict. Market makers are leading other market participants to speculate market movement because of the timely liquidation of equity stocks at the peak in Spring/Summer and shorting of stock equities before US debt downgrade. Day traders and individual investors learn to follow closely and the herding behaviour affects market movement significantly. On the other hand, as market drops to this level, the tremendous amount of sideline cash are attracted to enter the equity stock market.
When market makers see increasing buying from investors waiting on the sideline and reluctance of day traders and individual investors to sell at the beaten down level, the short positions are covered to take profit. The short covering creates strong rally without any good economic news.
Market provides opportunities but market behaviour is highly speculative. On one hand, market participants confidence are extremely low and market makers have been driving down market for profit. On the other hand, there are tremendous amount of sideline cash which are desperately looking for return. Investors are chasing after assets other than equity stocks and real estate which are the main cause of the financial meltdown. Gold and treasuries are at historic record level on surging demand.
If market makers cannot find opportunities to drive market further down, other market participants may slowly recover confidence based on improving corporate earnings and attractive valuation and dividend. In addition, investors are upset seeing the low interest return on a large pile of cash and increasing inflation threat. Most market participants are waiting for opportunity in a turbulent market. If market makers see opportunity to drive market up, it may create a strong rally based on herding behaviour of day traders and individual investors.
Be More Like Buffett: Buy Fear
As oft-quoted as Buffett is, few people have the guts to actually do what he says. Whenever people have the chance to be greedy when others are fearful, another Buffett bon mot, they tend to be too terrified to do anything.
Now is a Buffett moment. Fear is widespread. Many good stocks can be bought for decent prices, and Buffett has been active. Contrast that with stories of people dumping stocks because they are scared.
But it is precisely because of volatility that long-term investors should summon their inner Buffett and buy quality stocks, or add to positions in blue-chip stocks, especially those that pay hefty dividends.
Sell Today and Go Away: Macke
According to the Kansas City Fed, the hosts of the event since 1978, the Jackson Hole confab was intended to be a meeting at which "central bankers, policy experts and academics come together to focus on a topic that is not necessarily of immediate concern." In other words an economic dork-fest.
The bulls are reliant on hope that Uncle Ben pulls a QE3 out of his hat. Bulls want Bernanke to "come up with a surprise" is how Nesto puts it. The bears are of the belief that Bernanke will do no such thing, and even if he does come up with a QE-variant, it won't work. The ursine crowd isn't really betting huge on the reaction to the news but you can bet any Bernanke-rally based on the Jackson Hole meeting will be sold.
Super Undervaluation Is Here: Don Hays
The chief investment strategist at Hays Advisory of Brentwood, TN not only thinks the worst is over and volatility has peaked, but that we're also not in a recession.
"You can't go by your emotions" he says. According to the indicators Hays follows, "the peak of downward momentum was reached two-weeks ago, much like it was in May of last year." Right now he says the market is in a period of "super undervaluation."
"Things are happening right now that are very appropriate for long-term investors to be moving in to stocks, not out of stocks."
'Middle' May Help Investors Driven to the Edge
This race to the edges has crept steadily into investing strategies. Amid great market volatility, people are shifting either into the safest investments they can find or, conversely, seeking greater reward through greater risk.
"There is so much cash sitting on the sideline, just like there was in the late '30s and in the '70s," Courtney says, adding that very familiar trends are shaping up. "We had volatile markets, you had people pulling their money out of investment assets and putting them into cash. That depressed interest rates for a long period of time and the interest rates did not keep pace with inflation.
Stocks Pare Gains As “the Bears Appear to Be in Control” Says Technical Strategist
After talking to Ryan Detrick, Senior Technical Strategist at Schaeffer's Investment Research, and hearing him list a half dozen positive reasons to own stocks, his sentiment is still cautious as he waits for a better price.
"There's a lot of room to go lower to the previous major lows. So right here we're concerned that the hedge funds aren't putting their money to work and kind of know that market is weak. So for us, it's kind of dicey here," he says. "The bears appear to be in control."
Detrick is not expecting a major crash from here, he's just waiting for a smoother environment. Right now, he says "smart money is accumulating and so-called dumb money is selling" in size at this level. All of these are usually good indicators, he says, yet this time it's different. Even Ben Bernanke can't address a crisis that's global in nature, Detrick says, adding that he is doubtful that the Fed chief "can cure everything."
Low rates squeeze savers and may hold back economy
Low rates are a tool that Fed officials have long used to boost weak economies. In recessions past, when the Fed slashed rates, a drop in borrowing costs led companies to hire and expand.
More people bought homes, too. Stronger home sales encouraged builders to erect houses and hire construction workers. They also increased consumer spending as new homeowners bought appliances and furniture. That's why a housing recovery normally energizes the entire economy.
It's true the Fed's easy-money policies may have kept the economy from getting worse. And they might have prevented a dangerous deflationary spiral of falling prices, wages and profits -- a threat that had worried Bernanke a year ago.
New homeowners might not qualify for mortgages because banks have tightened lending standards after absorbing loan losses during the recession. And a vast inventory of foreclosed homes will likely depress housing prices for years.
"Someone is paying a price for ultra-low interest rates: the patient and uncomplaining saver," writes Raghuram Rajan, a University of Chicago finance professor.
Analysis: "Safe haven" assets start to look risky
This year's heady bout of risk aversion on financial markets has ratcheted up demand for gold, U.S. Treasuries and the Swiss franc to levels that suggest they may no longer be the "safe havens" they are billed as.
Some investors see all three as vulnerable to a sharp sell-off should the global economic environment improve over the coming months, or simply because prices are too high in the absence of outright financial catastrophe.
Debt Will Haunt the Market for Years to Come
And even now, as markets have stabilized and come back a bit, nervous investors are waiting for the next shoe to drop.
The market may rally and then sell off as the debt crisis waxes and wanes and we may see bull market runs, as we did from 2009 through earlier this year.
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