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Daily Blog -02/24/09- 2:26 P.M.

Oversold Bounce Right On Schedule

U.S. markets are bouncing in spite of a widely negative day for stocks across global markets. News out last night that insurance giant AIG is poised to report the largest quarterly loss in U.S. history of $60 billion next week failed to truly weigh on American markets. The rest of the world was not so resilient. Asian markets were down sharply. The Japanese NIKKEI came close to a 3% decline intraday but managed to rebound to a 1.5% loss. The Hong Kong Hang Seng index lost 2.8%. Meanwhile the Shanghai Composite plunged 4.5%. Jumping to Europe the French CAC 40 lost 0.7%, the English FTSE lost 0.9% and the German DAX fell 1%.

The first half of trading on Tuesday was overshadowed by Federal Reserve Chairman Ben Bernanke's appearance at a two-day meeting with U.S. Congressional leaders. This morning Bernanke was speaking before the Senate Banking Committee and told lawmakers that we have to focus on repairing the banking system or the economy has no chance of a strong recovery. By the end of Bernanke's talk the market had begun to bounce led by big gains in the financial stocks.

The BIX banking index is currently up 12.7% and the BIX is up 10.9%. The XBD broker-dealer index is up 7.8%. The entire market is seeing a sharp oversold bounce with gold and the U.S. dollar as exceptions.

Sector Strength
Dow Transports..... +3.7%
DJUSRR railroads... +4.9%
DJUSHB homebuilders +11.8%
CYC cyclicals ..... +5.1%
XAL airlines ...... +1.4%
DFI defense index.. +1.4%

RLX retail index . +4.5%
DJUSCA casinos ... +3.5%

USO oil ETF...... +3.1%
OIX oil index ... +3.5%
OSX oil services  +5.2%
XNG natural gas.. +2.5%

HMO healthcare ... +2.1%
IUX insurance .... +5.5%
BTK biotech ...... +1.5%
DRG drug index ... +1.1%

INX Internet index +3.1%
SOX semiconductors +4.1%
NWX networking.... +3.2%

The S&P 500 index hit its November 2008 lows yesterday and the market is delivering an oversold bounce right on cue. Bear-market rallies tend to be sharp and we're definitely seeing that in financials. A normal 38.2% Fibonacci retracement of the S&P's three-week decline would lift the index toward 794 while a 50% retracement would see a bounce back toward 809. These are the levels I would expect the bounce to roll over.

Chart of the S&P 500 index:

Chart of the NASDAQ:

Chart of the Dow Industrials:

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