Trusting Bernanke

Do You Believe We’ll Recover in 2009?

By Bryan Bottarelli
Monday, March 16, 2009 10:20 AM EDT
Mon, 16 Mar 2009 14:20:00 GMT

Dear Bottarelli Research Member,

Good morning.The major market averages are starting the week off with a gain, as the buzz today is about Fed Chairman Ben Bernanke’s appearance last night on 60 Minutes where he said that the recession is likely to end this year. This single comment is giving investors a reason to buy into the markets, illustrated by the Dow chart below.

INDU

Over the last four trading days, the Dow has bounced from 6,500 up to 7,300. In all honestly, the Blue Chips could move up to 7,500 — but that’s where I would be looking to short it. I admit, this has certainly been a nice bounce, but let’s not kid ourselves: This recession/depression is far from over.

To be perfectly honest with you, I’m shocked and amazed that investors are still taking Bernanke’s word. Let’s not forget, this is the same guy who, on Wednesday, March 28th 2007, told Congress that troubles in the market for risky mortgages doesn’t appear to be spreading to the overall economy. In prepared testimony to Congress’ Joint Economic Committee, Bernanke said "at this juncture, the impact on the broader economy and financial markets of the problems in the sub-prime markets seems likely to be contained.” Two years later, it’s crystal clear that this comment represents one of the biggest errors in the history of the Federal Reserve. So forgive me if I’m hesitant to buy into his latest prediction.

In contrast, let’s continue to play things close to the vest. In my view, we currently have about 200 points of upside risk compared to 1,000 points of downside risk. So obviously, the downside scenario takes precedence — but that doesn’t mean I won’t respect the bulls’ ability to make one final upside push. I’ll monitor the situation this morning and then follow up later in the session as events (and hopefully new trading opportunities) unfold. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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