Federal Reserve Chairman Ben Bernanke speaks at 10:00 am ET this morning from the Kansas City Fed’s Jackson Hole Summit. Participants in fragile asset markets are looking for a clear message concerning the Fed’s strategy to address recent economic weakness. A generic delivery by Bernanke could light the fuse for another leg down in asset prices. A speech hinting toward or clearly outlining additional quantitative easing could spark a rally in risk assets.
We put the current market environment into the “prove it to me” category. Markets remain weak, but they have reached a point where the odds of a short-term reversal are becoming more favorable. Tornado watches and tornado warnings serve as a good analogy for the state of the markets. A tornado watch is issued when weather conditions are favorable for the development of tornadoes in and close to the watch area. A tornado warning is an alert issued by government weather services to warn an area that a tornado may be imminent. A warning can be issued after either a tornado or funnel cloud has already been spotted, or if there are radar indications that a tornado may be possible.
Currently, the markets are in “rally watch” mode, meaning conditions are favorable for a rally to develop, but not much in the way of bullish activity has occurred to date. We remain open to bullish outcomes, but prudently skeptical until we have some evidence to support a possible intermediate-term bottom in asset prices. The CCM BMSI closed Thursday at 312, which aligns well with a weak market that has a better than average chance to rally in the coming days and weeks. For now, the bears remain in control until the bulls can muster enough strength to cross the “prove it to me” threshold.