Bearly Solvent

Random Thoughts

Rating: 3.00 not yet rated(3 votes)    Vote:

You are logged in as | Logout

With my neck brace firmly in place, I am watching the market intensely. I am feeling a little better about my stance as a bear, after taking that beating on Monday. This market was extremely ready for a bounce, not necessarily extremely oversold. It was just moderately oversold in my opinion, although news commentators were crying loudly that it was extreme.

I wish we could have seen a dramatic downturn on Monday that would have been a definite bottom. Instead the Fed chose to again make this whole debacle play out as long as possible. We need to make some of these market participants quit cold turkey during their stint in credit rehab. What the Fed chose to do is the market equivalent of passing out the methadone.

The amount of negativity is overwhelming and I see no signs of daylight at the end of this credit crunch tunnel. For the first time in history the Fed is going to directly be exposed to the housing market by allowing distressed banks to put up risky home-loan packages as collateral. This bears witness to the fact of how severe our financial system's problems are. I have no doubt there will be a major bank failure this year and possibly more to follow. Bear Stearns is likely to fail and probably Citi as well. Make no mistake, this is serious situation. JP Morgan is trying to bail out Bear Stearns with the Fed's blessing. This quote is from an AP news article, "Senior Federal Reserve staffers said the arrangement allows JP Morgan Chase to borrow from the Fed's discount window and put up collateral from Bear Stearns to back up the loans. JP Morgan, a bank, has access to the discount window to obtain direct loans from the Fed, but Bear Stearns, an investment house, does not. This type of procedure, Fed officials said, dates back to the Great Depression of the 1930s but has rarely been used since that time." What strikes me is that the Fed is using more unorthodox methods than ever in its history, and still the crisis continues to worsen. If the Fed had never tried to keep the bubbles inflated in the first place, we would not be in this dire situation. The only cure for this ill is to let nature takes its course and we are going to just have to endure the pain. The problem is that the Fed will not willingly let this happen and is in fact contributing to the pain and doesn't even realize it. Its a real mess with no easy answers. I am not envious of Helicopter Ben.

I expect the markets to react positively if the Fed cuts rates by 75bp, at least initially. Anything less and we could be facing another minor market meltdown to the new support levels. I see short term support currently at the 1270 level on the S&P. If we break down from there, I see the next support levels at 1220, 1160, 1140, and 1060. It will take a miracle to keep us above the 1270 mark with the fast deteriorating situation in the financial arena.

Since we are in an established downtrend, you can draw a symmetrical trend channel starting on October 11, 2007. The Bollinger Bands in conjunction with a 20 day SMA indicate that volatility is just beginning to increase again. We are starting to bounce in between the bottom band and the 20 day SMA. If the bands begin to narrow again, I am willing to bet that the markets are going to break to the downside again. If it breaks through the 20 day SMA, it should carry through to the upper band for at least a few days.

There are my thoughts on the current market conditions. Whether they are right or wrong, I know one thing for sure. This market is giving me gray hair...at least the ones that aren't falling out. ;-)

Be safe out there.