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Oversold Short Squeeze for Markets: Dave's Daily

Stocks in this article: BAC GS KBE XLF BBY XRT USL

Bulls can spin it any way they want but the news today wasn't very bullish. Markets had gotten much oversold and POMO was piling up on trading desks so it didn't take much to stampede the herd. What news there was came first from Japan, where manufacturing growth was slightly better than expected. Next China reported inflation had risen to 5.50% and Industrial Production wasn't as bad as feared.

Nevertheless, China raised bank reserve requirements again by 50 basis points. Markets in both countries rallied. Despite there being no news from Europe to quell anxiety over the PIIGS situation, market rallies from Asia continued there. In the U.S., Retail Sales were down for the first time in a year but the news was better "than feared". Best Buy (BBY) did beat expectations by a little, which added to the positive sentiment.

Remember, once the McClellan Oscillator falls below -60 you can expect a rally just as we had the previous Thursday. But today's rally was clearly more robust than last week's mini-affair.

Commodities joined in the rally with oil, gold and other base metals but grains were weak. The weakness in grains is strange given flooding of the Missouri River and tight supplies. Bonds were sharply lower and the dollar was weaker.

Perhaps more interesting on Tuesday were comments and predictions from PMICO's Bill Gross regarding what a possible QE3 might look like as described HERE. The Fed has gone too far down the road to stop its manipulations it seems.

We had a signal to close short equity positions based on Monday's close and did so at the opening. We gave back some profits but still made good returns.

Now what?

There's plenty of data to come throughout the week beginning Wednesday with Empire State Manufacturing Survey, CPI, Industrial Production and Housing Index. Then close the week with Friday's quadwitching which is always entertaining if nothing else.

As has been the pattern, volume was lighter on the rally than previous selling while breadth was quite positive easing the short-term oversold conditions.

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