The rally is close at hand

Founder and Publisher of the Switzer Report
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Happily, the Dow Jones index didn’t plunge again over the weekend, in fact it rose 0.35%. But who knows what will happen next, especially since the consensus view on the Group of 20’s contribution to the drama has been assessed as a lot of talk with little action.

Despite this, the longest serving stockbroker on the trading floor of the New York Stock Exchange, who has been bearish lately, has predicted a big bounce this week! I’ll tell you more about that in a minute.

But first, let’s take a look at where we stand right now. Last week, the Dow and the S&P 500 indexes lost more than 6% and our S&P/ASX 200 played follow the leader.

Meanwhile, the G20 finance ministers, including our recently crowned ‘world’s greatest’, Wayne Swan, got together and promised to do what was necessary to give security to the world’s financial system. However, no concrete plans were hammered out.

So we’re left with a “trust me, I’m a politician making a promise to deliver” feeling, and that might not wash with investors given the mood we’re all in.

Economically, the US will be in focus this week with a busy data calendar ahead. The very important Chicago Fed National Activity Index comes out tonight, and this survey is regarded as a very good early warning indicator of where the overall US economy is heading. On top of that, the S&P/Case-Shiller home price index as well as consumer confidence is out tomorrow, while Wednesday we’ll see the latest US durable goods orders. On Thursday we’ll get the latest read on economic growth, corporate profits and pending home sales, which will be followed by more data on income, spending, Chicago manufacturing and consumer sentiment.

Better-than-expected results could help Wall Street, but the market sentiment will ultimately be directed by what happens in Europe and that’s why a big G20 play over the weekend would have been handy.

We need to see “an overwhelming force” emerge in Europe’s financial markets, as the US Treasury Secretary, Timothy Geithner, suggested. He’s absolutely right, but the Europeans virtually told him to “sod off” on the basis that they don’t need lectures from the Americans. But they do!

A US-like Troubled Asset Relief Program (TARP) to help European banks as well as the European Central Bank taking on the Fed’s role as the lender of last resort would help appease bewildered and shell-shocked investors. If something similar was offered, market sentiment would turn around fast.

That said, Art Cashin – that long-standing NYSE trader I mentioned earlier – sees a silver lining in this black cloud. I interviewed Art, who is the director of floor operations at UBS Financial Services, when I took my SWITZER program to Wall Street last year.

He told CNBC over the weekend that a “massive rally” sometime this week is highly possible.

He said if the Europeans fail to impress, we could get hit again today and this could be what experts call capitulation selling.

“It usually ends on Monday, sometimes it spills into Tuesday morning, but from that comes a massive rally, so we’ll look for capitulation as a possibility,” said Cashin.

Two things are for certain – stocks are oversold big time. And secondly, we have been in Europe’s hands since May and these are not reliable hands to be in. But the law of averages says they have to get something right sooner or later because they have been getting it so wrong for so long!

Let’s hope they do.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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