Last Friday’s Stock Market Reversal – Is The Bid Back?

February 25, 2008
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Last Friday, the looked as if it was going to break out of the wedge and test the downside. Selling pressure was strong all day and then in the final 30 minutes of trading, the market staged a huge 30 point reversal in the S&P 500 futures. That is a tough environment. Rumors circulated that a banking consortium would bail out trouble bond insurer ABK. That notion spilled over to foreign markets. Europe and Asia posted nice gains and they provided a spring board for our market this morning. After an early rally, the market is once again, testing the downside. The selling pressure has been rather subdued. This market reaction should send a clear signal to our Federal Reserve and Treasury Department. If they are truly concerned about consumer confidence, they should start by removing uncertainty from the financial markets. Last week, the UK got rid of a rotten apple, when it nationalized Northern Rock Bank. If MBIA and Ambac were supported by the government or a banking consortium, the market would have a positive reaction. The government needs to back Fannie Mae and Freddie Mac to add fuel that confidence. This scenario would do more for the financial markets than any interest rate cut, or stimulus program. Once the market regains its footing and the damage can be assessed, financial stability will return. Over the course of months, people will take comfort knowing that their financial investments have stopped going down and they might open up their wallets. The risk premium that is built into credit cards, home equity loans and mortgages will start to decrease. When the economy is slowing, investments are losing value and home prices are dropping, it is virtually impossible to convince consumers to spend more money. Tomorrow, the market will digest the latest PPI number. Commodities are trading near all-time highs, and it is unlikely that we will get any relief. As long as the domestic and global economic growth picture stays intact, the market seems willing to accept higher prices. Wednesday and Thursday we will get a read on durable goods orders and the GDP respectively. Here is how I see the week playing out. If the bond insurers are capitalized, the market will breakout to the upside. This issue is coming to a head and the bond rating agencies have reached the end of their rope. If the AAA ratings are lowered, the market will breakdown. If we do not get any positive developments in the next day or two, the PPI and the GDP will weigh on the market. The market is desperately searching for good news and if it does not get some soon, we are likely to test the capitulation low. Stay long agriculture, energy and mining and stop the trade out on a close below SPY 133. image

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