Overbought, but holding. Plus, Direxion Inverse 3X Financials (FAZ)

July 21, 2009 by Kenneth Reid

11:50 am ET

The major indices are technically overbought, but are resisting downside pressure. One reason is that in Fed Chairman Bernanke's testimony to Congress, he stated that although unemployment is likely to remain high into 2011, the Fed will only consider tightening monetary policy once the job market shows signs of recovery. Since employment is a lagging indicator, this is evidence of a hyper-accommodative Fed.

In an OP Ed piece in the WSJ, Bernanke offered assurance that the Fed has ways to make sure the increased level of cash reserves at banks will not create an inflation problem. That should hardly be difficult. These reserves have not increased the money supply yet, as banks are hoarding the cash to deal with future losses.

Thus, there is little concern about stagflation. Few are discussing the possibility of deflation, however, which would be a much more difficult problem to manage and, I think, a more likely end-game scenario in a post-bubble U.S. economy.

Financials are weak today. This is a low risk entry point for the leveraged inverse Financial ETF (FAZ), with a stop below today's low. I would not get overly bearish, however. This is a trading call.