9.19.08

9.19.08

     Global markets soared the last two days in relief that more bailout money, tons and tons of it this time, will be going into financial firms to prevent any more of them going under. The government has already taken over Fannie Mae, and Freddie Mac, the largest real estate mortgage providers in the nation, and AIG, one of the largest insurance companies. And now the government will apparently form a corporation to purchase any toxic assets that other financial firms would like to sell them, while also intervening in the markets to protect financial companies they will have such large stakes in from normal market activities (with their ban yesterday of normal short-selling of some 699 financial stocks). But as I've said before, there is no choice but for the government to bail out the financial institutions, no matter the cost now in still higher record federal budget deficits, and to future generations who will be responsible for the additional $trillions of national debt.

Gold, for centuries the traditional safe haven in times of financial uncertainty, didn't like what it saw. It was up every day this week, regardless of what the stock market was doing, and closed up a huge 14.3% for the week.

Government bonds didn't like what they saw the last two days; that the government will have to significantly increase its debt by selling a boatload of additional bonds. Twenty-year treasury bonds plunged 1.4% Thursday, and another 3.5% yesterday, a loss of 4.9% in two days, a huge decline for a supposedly stodgy and conservative investment. But the stock market loved it, gaining 7% over the previous two days after losing 7% over the previous three days to break even for the week.. 

 This was the quarter's quadruple-witching expirations week. There is a very strong pattern of the market being down in advance of expirations (as program trading firms drive the market down with sell programs so they can buy the soon to expire options for pennies on the dollar), and then for the market to rally strongly near the expirations (as the program-trading firms drive the market back up with buy programs, so they can take the huge profits on the options they previous bought for pennies on the dollar).

The pattern was skewed this time but certainly did take place. The decline usually takes the form of the week before the expirations week being negative. This time the previous week was positive. However, a big decline took place Monday through Wednesday this week, with the Dow down a huge 7% over those three days. And then the big rally into the expirations was also much larger than normal. But when all was said and done, no pain no gain for the week, the market right back where it was last Friday.

If that had occurred without the excuses for the moves being such dramatic outside factors, the near collapse of the financial system, and then the promise of a dramatic rescue, I'd be saying it was just the typical down, back up pattern leading up to the expirations, and pointing out that the rest of the pattern is for the market to be down the week after the expirations.

  But, these were dramatic outside events and previous rallies and even new bull markets have been launched in the past by dramatic stimulus plans and rescue efforts by the government. The most recent examples were the rescue efforts (big interest rate cuts) after the mini-crash in 1998 in response to the collapse of Asian currencies and markets and the simultaneous failure of hedge fund Long-Term Capital Management. And then there was the big stimulus effort after the 911 terrorist attacks in 2001. Both times the stock market took off like a rocket.

So, if this week had not included such dramatic outside events, I'd be saying it was just the typical pattern leading up to the expirations, and pointing out that the rest of the pattern is for the market to be down the week after the expirations. But there were dramatic events that might make for a big difference with the timing since it took place during an options experation week.. 

  Thursday morning and Friday morning, the Dow was extremely oversold short-term beneath its 21-day M.A. to a degree that should produce a bounce back up to the potential resistance at the M.A., and that has happened. And now next week being the typical negative week after options expirations, the odds are the market will fail at that short-term M.A. resistance again.  

But the dramatic outside events did take place, so I'm not making any prediction for next week at this point. We'll just have to wait and see what develops over the weekend. 

Next week is a very light week for potential market-moving economic reports. So the market will continue to move in response to the debate over whether the dramatic government actions will result only in a bail-out of financial firms, or will also affect employment, declining corporate earnings, the slowing economy, the housing glut, global inflation, etc.

The only important economic reports will be Existing Home Sales on Wednesday, Durable Goods Orders, and New Home Sales on Thursday, and the Final estimate of Q2 GDP growth on Friday.

 Going forward is still going to have a lot of speed bumps along the way. Needless to say, we advise conservative accounts to remain in CASH until the smoke clears and an informed appraisal can be made about the road ahead. Those of you who like the thrill of a market with high volatility may want to put a small amount of your aggressive account on the Long side of the market. Don’t let the fear you felt on Tuesday turn to greed because of what happened on Friday.

Till next time

 The MTA Staff