Courtesy of John Nyaradi.
World central banks open the liquidity spigots to fight off global credit crisis
A monster rally swept major U.S. indexes today as coordinated global central bank action to avert a credit crisis triggered a ”risk on” rally reminiscent of March, 2009. The Dow Jones Industrial Average (NYSEARCA:DIA) vaulted +4.2% while the S&P 500 (NYSEARCA:IVV) jumped 4.3%% and gold (NYSEARCA:GLD) added just 1.98% which was interesting since today’s move could be considered inflationary to say the least.
But for today it was the Federal Reserve, joined by England, Switzerland, Japan and Canada in opening up the fire hoses to douse the growing flames of the credit crisis and the Financial Sector was a prime beneficiary with a one day pop of 6.2%.
The central banks acted in response to tightening credit conditions among Europe’s banks and to ensure that the system had enough liquidity to keep functioning, a move similar to those of 2008-2009 during the “last” financial crisis. China joined in the party by cutting its bank reserve requirements in a stimulative move and all of today’s action came after last night’s downgrade of major global banks both at home and in Europe.
So it was an exciting day, but has anything really changed?
From a fundamental point of view, this action dampens the flames but does nothing to fix the long term problems in the financial sector of Europe. At best it buys some time to look for a workable long term solution.
From a technical perspective, the fireworks were exciting but nothing has yet changed.
chart courtesy of www.stockcharts.com
In the chart above, you can see how the index vaulted off the blue Bullish Support Line, keeping the longer term bull market intact but that the price stopped short of a “buy” signal at the 1250-1260 level and so the short term view still remains negative.
Now the real test will come to see if there can be some follow through to the upside or if the indexes will stall again within the recent trading range.
So while today was exciting, it was nothing to get excited about. Over the past two decades, Japan tried similar interventions nearly a dozen times that sparked significant rallies, only to find their market down more than 70% from highs last seen twenty years ago.
Patience and discipline remain the watch words as we head for the Holidays.
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