Oversold Short Squeeze for Markets: Dave's Daily

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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The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.

Continue to Concluding Remarks

Now we've had the oversold rally again on light volume. But a rally is a rally and we'll see what kind of follow-through can take place.

Pandora prices tonight but investors should be concerned about their growth. The higher number of users means more royalties Pandora must pay to music companies. It should be a concern but IPOs have been hot stuff lately so we'll see how this one goes.

Let's see what happens.

Disclaimer: The ETF Digest maintains active ETF trading portfolio and a wide selection of ETFs away from portfolios in an independent listing. Current positions if any are embedded within charts. Our Lazy & Hedged Lazy Portfolios maintain the follow positions: VT, MGV, BND, BSV, VGT, VWO, VNO, IAU, DJCI, DJP, VMBS, VIG, ILF, EWA, IEV, EWC, EWJ, EWG, EWU, BWD, GXG, THD, AFK, BRAQ, CHIQ, TUR, & VNM.

 

The charts and comments are only the author's view of market activity and aren't recommendations to buy or sell any security.  Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period.  Chart annotations aren't predictive of any future market action rather they only demonstrate the author's opinion as to a range of possibilities going forward. More detailed information, including actionable alerts, are available to subscribers at www.etfdigest.com .

 

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Dave Fry is founder and publisher of ETF Digest, Dave's Daily blog and the best-selling book author of Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management, published by Wiley Finance in 2008. A detailed bio is here: Dave Fry.

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