Is a Relief Rally Ready to Roll?

Have markets hit a short-term low?

We think so. Right now, all of our open positions are poised to profit in a rising market. Of course, the market will move in whatever direction investors take it, but we think conditions are favorable for welcoming a relief rally.

Here are a few reasons why.

1. Markets do not move in straight lines. While it is obvious we are in an intermediate bear market trend, positioning and short-term catalysts can lead to sharp short covering rallies as the cycle continues.
2. Sentiment is downright ugly and the apathy is palpable. The market serves to surprise and disappoint investors. When sentiment becomes extremely one-sided, markets have a tendency to self-correct and move in the opposite direction, if only in the short term. As the saying goes, “markets can stay irrational longer than investors can stay solvent.”
3. Overall, fundamentals in the financial sector are not as bad as the price action suggests. Financial stocks have become ground zero in the most recent leg lower. With the turn higher of 4% on Friday and upward follow-through on Tuesday, we could see the leadership the market has been seeking. To be sure, many of the reports I read over the weekend conclude that U.S. financial institutions are in good shape and predictions of another 2008 for the banking sector are just plain wrong.
4. Action is underway by OPEC and other oil-producing nations to curtail the massive supply and demand imbalances. While a freeze in production is probably not as desirable as an outright cut, it does signal some activity and, more importantly, coordination of efforts to stem declining oil prices.
5. The Chinese currency is stable despite the less-than-stellar recent data points. The fear of a massive devaluation coming out of the return to trading from the Chinese New Year has provided some reason for optimism that Chinese central bankers are committed to accommodative policies and currency stability.

For these reasons, we think our short gold and utilities positions, as well as our long oil and financials positions, should do well in the days ahead. We will be looking to exit our GDX options and GDXS position soon, so be alert to incoming emails from us advising you accordingly. Moreover, with options expiring this week, we should see some more opportunities ahead with increased volatility.

We have six open positions and all of them remain buys. Sell instructions will be issued via ETF Trader’s Edge special alerts.

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Best,

Doug and Tom