In the long-term, the market is driven by economics.  But in the short-term, the market is driven by sentiment and liquidity.  This maxim was especially driven home today as the market had its best day in a month. 

The catalyst for the up move was a speech this morning by Fed Chairman, Helicopter Ben Bernanke, when he stated that the Fed is considering extending the lending window to the investment banks into 2009. 

But if there is any doubt that the market is often driven by the button-pushing programs in the near-term, such doubt was dispelled by today’s intra-day market action. 

At 2:30pm, with the Dow meandering about flat for the day, the button-pushers went to work and the market began methodically moving higher, closing the Dow 152 points higher.  Similarly, the S&P 500 rose 21 points and the Naz gained 51 points, all within the last 90 minutes of trading.

More evidence of the button-pushers at work could be seen in the international markets.  The Toronto Stock index, which was down 150 points at 2:30, finished up 100.  Brazil, which was down over 600 points mid-afternoon tacked on a 450 point gain for the day.  Mexico was off 180 points, then closed up 167, jumping 100 points in one minute just after 3pm.

That is the work of those who push a button on their computer to buy or sell entire markets based on macro factors.

The rally also smacked of short-covering.  The Dow Jones US Real Estate index rose 4% in the last 23 trading minutes of the day, closing up a whopping 7% for the session.  Both the bank index, ticker BKX, and the homebuilders each rose 6% from 2pm onwards. Even the left for dead retailers rose nearly 2% in the final 90 minutes of the trading day.

However, the market should have rallied today.  Oil was down $5 with Iranian President Ahmadinejad stating that there will be no war with Israel and the United States, and the market as oversold as it has been in years. 

Perhaps most importantly, however, was Bernanke’s speech this morning stating the Fed was ready to extend credit to the investment banks into 2009. 

The market has responded to government support.  When the market was collapsing during the winter, market participants believed that the government would not step in to prop up the financial system.  Only when the Fed cut the funds target by 125 bps and bailed out Bear Stearns did the market rally.

Now, the market has been worrying that the Fed is in a box, unable to respond with lower interest rates because of inflations concerns, a weak dollar and rising rates in Europe.  With the action today, investors’ concerns were assuaged, at least for the moment, that the Fed can and will respond to stresses in the financial system.

I have been looking for a near-term bottom.  Today may have been it.  If not, I expect a bottom either this week or next, with earnings as a catalyst to drive the market higher. 

I have been paring down short positions and will look to get long in the near-term.  I am short REITs, though decidedly less so than a few days ago. I remain short Canada. I look to continue reducing this position over the next few days unless the market rallies sharply. 

However, a bounce will be just that, a bounce.  I suspect there are more difficulties to come.  Thus, for the moment, everything is a trade.

EDIT - Thanks to Dave for pointing me in the general direction of a calendar.  This column is for July 8th.