We face a fork in the road at those support levels yesterday and it held - creating a double bottom to rally, rather than that second choice of breaking support. It was going into the late session that saw the hard and strongest part of the rally.
Usually going into expiration we see stocks move towards the heavy Open Interest strikes - but with the recent market volatility the OI is scattered and we have seen stocks make streaks through several strikes. That means expect to have a volatile expiration and don't really on OI to create pinnage - it may not happen. Also do forget to watch stocks after the close - there will be money on the table and get those Do/Do NOT exercise notices out - expect to see stocks move in and out of strikes after the close. That means with this volatility there could be some serious money left on the table after the close.
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LIBOR continues to fall - but still at nose bleed levels
The Fed Funds rate is at 1.5% and 3-month LIBOR is still at 4.42%, it came in another 8bps since yesterday. Sure the overnight has come down to very low levels - but the transactions on the overnight are still rather tight and we really need to see the 3-month rate get down below 2% that will reflect a broad ease in credit lines. Since the reserve pool is tapped out the Target Rate at 1.5% is almost meaningless, the Discount Window (lender of last resort) has taken anything and everything for collateral to lend money - so borrowers are tapped out on equity. Before we can see money flow down the target pipes we need LIBOR to start flowing and that means lower rates.
But what does the picture look like when all is said and done? I am sure at some point the money poured into the system will stabilize the banks - and that will take a few more quarters, since there are more write-downs in the pipes. Maybe mid to late 2009 the banks will be stabilized. However, while the government will stabilize the banking sector and may save a very broken system, it's the consumers that will STILL not have any credit lines.
The 3/4 or the GDP comes from consumer spending, in fact the world moves when consumers spend money. While true we may save the banks and eventually the write-downs will end, what about the consumer? They are FULLY tapped out - credit lines are shut to them. There is NO equity left in their home and for those few new home buyers it will be harder to get credit lines. Auto companies have dropped several lease programs and you need a perfect credit score to buy a car. Many forums of credit will require huge down payments 10,20,30,40,50% and fixed long-term rates, which may be higher than what consumers are use to. Financing to consumers is going to change and I think many will be shocked on how hard the previous easy money will no longer be available. It will probably take years before we see easy credit lines available to consumers. Add to that the increase in jobless rates - well the GDP is going to see a squeeze like never before.
We will most certainly see an end to the credit freeze, the write-downs, and the banking problems - probably as soon as mid 2009. But that will NOT stop the recession from coming. At the end of the day if the consumer can't afford a widget and no one will give him credit to buy that widget - the widget doesn't sell.
Maybe we could give everyone another socialized stimulus check for them to spend!
This year part of the presidential debate is "Should healthcare be a right?" thus the government pays for it, soon to follow "Should owning a home be a right?" thus the government pays for it, after this recession hits it will be "Should consuming be a right?" ah more stimulus checks. If that doesn't smack of socialism or even communism I sure don't know what does.
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Housing continues to drag
The housing problem has been placed on the back burner as the credit markets have frozen, but it is still with us and housing starts are continuing to drop. We did see a low or slow down (depending on where in the country you are) and it seemed that we might of found or close to finding a bottom. However, the credit squeeze is starting to take a second whack at the housing market for those looking to purchase a home are having more difficulty getting a loan. Between higher mortgage rates, non-favorable terms, and bigger deposits it has become difficult to purchase a home. But what is interesting is that only seems to be affecting middle to higher income families. It was reported to me that lower income families and lower price homes are relatively easier to purchase - with aid of several government programs. Recently Freddie and Fannie - now under complete government control - are still swallowing questionable paper.
I guess that means if you have a job, credit score, and can afford a home than you are going to be raked over the coals to find a decent loan, but if you don't have any money or of very modest means the government will still help you buy a home? Of course everyone should have a opportunity to own a affordable home, right?
But again the problem is consumer spending (as mentioned earlier as to the GDP) - government aid and stimulus checks do not really contribute to the GDP (even though it has been counted into consumer spending - which in my humble opinion artificially shows increase spending when it is really the government spending) - but if the biggest ticket item, homes, drag and housing starts are expected to hit the lowest levels in almost 20 years - which is a huge source of equity for consumers - which helps additionally with all types of credit - that is going to continue to hurt the overall economy. The problem remains - no credit or hard to get credit to purchase homes.
The home story is still with us, even though it is on the back-burner. While prices may not fall that much further, they certainly will not be rebounding by any leaps or gains anytime soon.
Expect a longer recession.
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Futures Pre-Market
The futures are getting a good gut punch in the pre-market - LIBOR is falling - but NOT enough and we are still seeing write-downs in the financial sector. Futures are front running the cash - it is also expiration Friday. Expect Arb traders to buy futures going into the opening to short the basket. Expect a weaker opening.
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Support / Resistance
Double bottom? It looks like it - but it wasn't like it was created by volume, GTC, or market depth - but rather a psychological element. Technical analyst of the market is based on knowing where all the consolidation happens based on price and volume action. In typical markets stocks hit a support level and prices consolidate as it stock falls and hits thick volume, not enough sell volume can drive the price down through the buyers. Being able to look at market depth, GTC orders, and volume indicates support. The same is true for a resistance area. There is no magic behind it - it just is what it is. However in the last several weeks technical’s have failed - simply because there is NOT consolidation of price, there are NO volume or consolidation levels. That leaves psychological levels. Making it harder to find buying opportunities or selling opportunities. Pile on the government intervention, the short ban, and the uncertainty of the future - it's now just a high volatility game. It seems that we are seeing a double bottom forum, simply because we have a recent previous low and there is some volume in these areas (however they are very wide bands).
INDU 8000-8500 (9000) 10k (We are at the pivot point of 9000, 8500 seems to be a support with a low range of 8000. If this is a double bottom we could head back towards 10k. But with the daily government injections, more write downs, and more uncertainty - the game is still about volatility.)
NDX 1200 (1300) 1400 (We are at the 1300 pivot point - futures are pointing lower - 1200 needs to hold to have a support. )
SPX 900 (950) 1000 (Double bottom, getting above the 1000 mark will send a shot to 1100. However, we NEED to hold 900 to confirm any support level.)
RUT 500 (550) 600 (Again we had a good rally off the 500 level - getting above 550 then 575 means a good shot at 600. There is a good chance of resistance there - if 600 breaks to the upside then 650 is in the card for the future. 500 NEEDS to hold.)
Please note that these levels don't mean we could hit them today - but are just key alert levels as to where we may see support or resistance sometime in the future.
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Conclusion
Well BUSH has been speaking again this morning, he has spoken more to the public in the last couple of weeks than his entire presidency. It seems that Congress, Hank, Ben, and the rest leading the charge are pulling every trick out of the hat - but so far nothing has REALLY worked - sure we are seeing LIBOR loosen up - but not as much as Hank and Ben would hope for. They would rather see it drop as fast as it rose and get back below 2%. But banks are still not lending - and with the latest reports of more write-downs I am not sure they have the capital to lend. Tack on the volatile market which is playing havoc with their P&Ls and it is probably a nightmare making heads or tails out of balance sheets still choked full of crud.
Today is expiration day and with hyper volatility don't expect or rely on pinnage being the norm. We could easily blow through big OI strikes - depending which side the market makers are on (long/short contracts).
Also we could see (more so than in recent history) - huge opportunities at the close. That means have your do/do not exercise notices handy. Remember you can still trade issues after the official close, so what may be in the money at 4pm could be out of the money at 4:05 pm - same is true with those OTM options. That means there will be money on the table to grab. WATCH the close.
If you are short any OTM strikes - it is better to close then for a .05 or .10 then to risk them going back ITM - even after the close. This stocks are making insane moves in the post and pre-markets. Getting exercised on a OTM option that you didn't close after the stock blows through the strike after the close - could mean a very bad Monday morning!
1 comment:
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