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Dead Cat Bounce

Posted by Larry Doyle on March 4, 2009 3:00 PM |

The equity markets are up almost 3% today. Did we just put in a bottom? Can we at long last expect better price performance? Are we seeing a turnaround in the economy? Well, in Wall Street parlance today’s price action is known as a “dead cat bounce.”  I had mentioned a day or two ago that a short term RSI (relative strength index) had fallen below 30%. Anytime that index gets that low, the market is susceptible to a bounce to force some short covering

The Federal Reserve released a report, known as the Beige Book, and highlighted that they expect No Turnaround Soon  in the economy.  

Additionally, even though the major market averages are up 3%, why is it that the major capital providers are down significantly on the day? Look at the price changes for the following:

JP Morgan -7%
Citigroup -3%
Wells Fargo -13% !!
PNC -8%
GE -4%  (based on serious concerns about capital needs at GE Capital)

These banks are down because the pace and level of defaults and foreclosures is expected to continue to move higher.  

I was struck by the fact that in the Beige Book report it is reported that economists from Goldman Sachs expect the economy to report a -7% GDP for 1st quarter 2009 and -3% for the second quarter. The report also highlights that the weakness in the economy is spreading to sectors that had been holding up until recently, including healthcare.

Not trying to deflate any enthusiasm that may come with a 3% upward move, but dead cats do not bounce very high!!


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