Good News From Financials and Qudruple Witching Will Preseve the Rally!

March 16, 2009

Author

Pete

Last week, the market put in a meaningful low that should represent support for at least a few months. The buying started Tuesday with good news from the financial sector. Citigroup announced that it had an operating income of $8.3 billion in the first quarter. We have to take this number in stride because it does not include write downs. Also, Citigroup has about $350 billion in toxic assets so they are far from out of the woods. Their Chairman also said that they will not need additional capital from the government. HSBC, Europe's largest bank, stated that they will not need additional capital. A few weeks ago, analysts projected that they would need to raise another $18 billion to shore up their balance sheet. The rise in unemployment has put pressure on credit card companies. This morning, CapitalOne said that defaults had barely inched higher in February (compared to January). The default rates have spiked 40% year-over-year and 8% of them are in trouble. The fact that the momentum has slowed is encouraging. CapitalOne also said that car loan delinquencies dropped in the last month. Over the weekend, Barclays said that it had a strong start to 2009. It is trying to sell its iShares business for $4 billion to shore up its balance sheet. It does not want to borrow money from the government. Bank of America and J.P. Morgan Chase said that they had been profitable in January and February as well. All of the good news from the financial sector has helped the market regained its footing. From the lows last week, it has staged four solid rallies. Each day, the downside was tested and bulls held firm. Last week, I mentioned that Goldman Sachs would release earnings this week. That is not the case. Last year they announced first-quarter results on March 17th and they have always released just before option expiration. Now I am hearing that their results will not be posted until early April. We do have one significant earnings announcement this week. FedEx will release before the open on Thursday. Traders will forecast future economic activity once guidance has been given. The New York Manufacturing Index hit a record low today, but the market doesn't care. Bad results are priced in. Consequently, I don't believe PPI, CPI, LEI or the Philly Fed will have much of an impact this week. Traders are much more interested in the financial sector. This week, FASB is meeting to discuss mark-to-market rule changes. From what I'm hearing, they may institute a mark-to-model program. A model would more accurately reflect current asset prices. Banks contest that the mark-to-market policy relies on the last sale which could have been made under distress a long time ago. Any relief would help banks and it would loosen up lending practices. The Treasury will also entertain discussions on a "bad bank". News from these two areas will have a much greater impact on the market than anything else. The FOMC meets this week, but they are "toothless". They have done all they can and they are out of bullets. That's why I believe Chairman Bernanke broke policy this weekend by appearing on 60 Minutes before a Fed meeting. He wanted to provide some clarity to the American public on our current crisis and there is not much else he can do. Now that the market has been able to get through resistance at SPY 75, I believe it will try to fill in the gap at SPY 81. It is certainly within striking distance and we are near the top end of the one-month range. This means that quadruple witching could have a positive bias this week. If that happens, we will see a nice short covering rally that could take us to SPY 84. I don't believe we will be able to get past that point. The market has come back a long way in a very short period of time and it needs to consolidate. Major resistance lies at SPY 92. In today's chart, you can see that the VIX has come way down. It is still over 40 and that is expensive by any historical measure. I am adding to short put positions this week and I am distancing myself from the action. We have a chance for a nice bear market rally and shorts are starting to get nervous. This is the first sustained rally we've seen in months and it is coming on fundamental news (not bailouts and stimulus plans). These rallies tend to last longer and go higher than anyone could have imagined so it is prudent to respect the move. Once the market stalls, it will set up a nice shorting opportunity. Historically, the middle of March is bullish and the end of March is fairly bearish. Unemployment will become a focal point near the end of the month and this rally will stall ahead of the release. This will be particularly true if initial jobless claims continue to move higher. For today, strong rallies overseas have paved the way for us to move higher. Advancers lead decliners by 4 to 1 and I expect the rally to continue. For the remainder of the week, I expect continued upside momentum. There are bound to be a number of days where we start with a negative open and grind higher throughout the day.