3/24/09 (Bear Market Rally? Bank's Roller Coaster!)

Traders,

Massive rally – WOW! The bears ran for cover and right at the opening the shorts started covering – all throughout the day. Last week I mentioned that we heard some “this is the bottom” rumblings and that the perception is just tired of the down-every-day market. And we had a good rally – even with the slight Thursday / Friday pull back.

It was Geithner’s Plan that spurred optimistic euphoria – and no doubt it is a great plan (for investors). But will it solve the problems? If you asked Pimco and Black Rock – they are all for it and are promoting it’s accolades. Why? Because they will be two of the five designated to buy the toxic assets. Even Bill Gross of Pimco said the tax payer will be on the hook for 85-95% of risk.

The other two big issues is that only certain products based on their credit ratings will be available for this plan (leaving many of the more toxic assets that are causing problems on the banks books). The second issue is price discovery – on the high credit grade paper banks are at 80-90 cents on the dollar, while the buyers are 30-40 cents on the dollar. No doubt giving the massive amounts of leverage to purchase the paper will bring the bidders up to possibly as high as 50-60 cents on the dollar, but I doubt they will pay the 80-90 the banks are asking for.

This morning one investment advisor mentioned that when the people really start looking into this plan it is simply just subsidizing the financial markets and allowing hedge funds and investment firms to leverage up massively (12:1) on the back of the tax payer. Little capital for huge rewards. He said he is just waiting to hear the “This plan is for the rich to get richer!” – So far the people are buying into this subsidized leverage plan – of course those that will be buying the paper on 12:1 leverage with 85-95% government backing are for it – wouldn’t you be?

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All eyes on Bernanke and Geithner

Congress will start questioning Bernanke and Geithner as to the AIG debacle, what they knew, and when they knew it. I doubt that “most” members of Congress will give Geithner to hard of a time, but questions will be raised. Additionally – more details about the Feds’ pouring of liquidity into the system and Geithner's Public/Private Plan will come to light.

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Bank Stocks !

If you missed the run in the bank stocks, well we might see a pause. Expectations of continued 30-60% rallies in one month are more than a little optimistic. Just the other day a couple of firms had downgraded a few banks from buy to hold – seeing they had already made a decent run.

Some of the banks are seeing a slight pull back in the morning after their nose bleed run yesterday. Goldman, JPM, and Morgan Stanley don’t have the problems that Band of America, Citi, and a few others have – but they have all participated steeply to the upside. It’s time to lock in some gains and be happy for what you have received.

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Futures Pre-market

The futures are down some in the pre-market. Expect ARB traders to buy the futures and sell the basic putting some pressure on stocks at the opening.

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Support / Resistance

Just a couple of weeks ago I was asked about playing the downside more aggressively as we were down in the 6500 range, a week later and 20% higher I am sure I will hear the other side. These are volatile times no doubt.

INDU 7500 / 8000 (We RIPPED through the 7500 line like butter – a test to 7500 this week is realistic, but so is 8000 – which is serious resistance.)

NDX 1200 / 1285? (We ticked at 1285 in Jan and Feb – is that a revisiting top area? Is it resistance?)

SPX 800 / 835? (Again not a resistance area of any caliber – but an area of previous low consolidation.)

RUT 400 / 450 (We need to find a support and resistance at this point.)

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Gold 900+ (Still up in the 920-930 area)

Silver 13+

Oil 50+ (Oil saw some volatility yesterday but played a back seat)

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Conclusion

Was this a violent up move in a Bear market or the start of the new Bull market? That is the question that everyone is asking – but has anything really changed in a day? Not really – just like the huge knee jerk down days, we will have knee jerk up days. The market will probably remain slightly bearish for the year as the fundamental recovery has a long long way to go. The job market has not turned around – nor does it look to for a long time. We quickly forget that the GDP is traditionally made up by 2/3rd consumer spending – which we all know that has dropped. The spending by the government will surpass consumer’s contribution to the GDP very quickly – however no one seems to be alarmed by that.

The Geithner Plan (which I think is great for those investors) does nothing to tackle the larger problem on the balance sheets (the real toxic paper at lower ratings) and at the core of the plan is another 85-95% of tax payer money at risk (via FDIC or FED). Ask anyone if they would want to make an investment for 50 cents on the dollar with 12:1 leverage and anyone would jump at the chance – it’s a one sided trade and I am surprise the public hasn’t lashed out yet. Of course it’s a case (the government would argue) of giving money and advantage to the (privileged) few for the betterment of the people. Really? I think there is some grasping and hoping at straws on this one. For now it’s not the fundamentals, but the hope and confidence we need to get out of this hole. For at the end of the day the dollar and economy are moving on faith and fighting math. Unfortunately in the end (regardless of how long it takes) – math always trumps hope.

As I say – we can choose to ignore math, but we can’t avoid it.