Sam Collins

Watching Washington

by Sam Collins   09/29/08

On Thursday night, Congressional leaders announced that there was still no agreement on a $700-billion financial rescue plan, and some even said that one might not pass at all.

It was revealed that Republican and Democratic leaders got into a shouting match at a White House meeting which ended in a walkout. With that -- and the news that Washington Mutual (WM) had been seized by regulators and set a record as the largest bank failure in U.S. history -- the market went into a tailspin at the sound of the opening bell on Friday. It was off almost 150 points in the first minutes of trading.

Later on Friday, JPMorgan Chase (JPM) said that it would acquire the assets, deposits and some liabilities of WaMu for $1.9 billion. And even later in the day, JPM managed to raise $10 billion in a common stock offering and that seemed to ease the tension.

As Friday's trading session wore on, there were signs that the parties were in discussion and a deal might be worked out over the weekend. President Bush said that, despite the rancor between and within the political parties, he was confident that a relief plan would get passed.

In economic news, the Commerce Department said that the economy was not as strong as previously reported. The second quarter had been reported as growing at 3.3% but that was revised down to 2.8%.

In the last hour of trading, investors became more optimistic regarding an agreement on the Treasury Department's plan and stocks steadily rose. At the close the Dow Jones Industrial Average (DJI) was up 121 points to 11,143. The S&P 500 (SPX) closed at 1,213 -- up four points -- and the Nasdaq (NASD) fell three points to 2,183.

Volume was light again as long-term investors awaited the outcome of the political wrangling over the bailout, and the New York Stock Exchange traded 1.2 billion shares with more decliners than gainers by 2-to-1. The Nasdaq traded 809 million shares and decliners there were ahead by 4-to-3.

For the week, the Dow was down 2.2%, the S&P 500 was off 3.3% and the Nasdaq fell by 4%.

Crude oil for November delivery fell $1.13 to $106.89 a barrel, and the Amex Energy SPDR (XLE) fell $1.85 to $67.70.

Gold (the December contract) gained $6.50 to $888.50 per troy ounce as investors made a flight to safety while liquidating other assets. The PHLX Gold/Silver Index (XAU) fell $3.19 to $138.28, turning away from its 50-day moving average while the stochastic issued a sell signal. The next support for the XAU is from $120 to the recent low at $110.70.

What the Markets Are Saying

While last week's wild trading did not break the panic closing low at S&P (SPX) 1,156.39 and the intraday low of 1,133.50, both made the week before, it did provide for an interim test of that low.

For now, it looks like that extreme sell-off could provide a permanent bottom, but only because of the characteristically high volume, an almost record number of new lows, very high volatility numbers, and treasury yields not seen since the 1930s. This panic caused what is commonly referred to as a "climax bottom" or "selling climax" and was confirmed by our own Collins Bollinger Reversal (CBR) system with two distinct buy signals.

But will it hold?

Much has to do with the "rescue package" and investors' confidence in the political and financial structures. But, technically, if the lows are penetrated, the next support is at 1,080 to 1,060, with a major Fibonacci number at 1,078. That represents a 61.8% retracement of the prior five-year bull market.

On the upside, there is considerable resistance at various stages of advance but with the first coming at last week's highs of 1,255 and 1,265. Then 1,261 to 1,303 and, of course, the more formidable resistance that we've talked about for months between 1,320 and 1,375.

But with so much energy expended on the downside and many investors paralyzed by fear, the market has become like a compressed spring just waiting for a resolution (almost any resolution) of Congress' inaction.

If the politicians can manage to agree on anything and make it stick, the chance of a sharp rebound is highly likely. But investors should stay away until a longer-term resolution is achieved while traders grab for an ultra-long Exchange-Traded Fund (ETF) and try to play for a bounce.

Today's Trading Landscape

Earnings to be reported include: Cal-Maine Foods (CALM), Circuit City Stores (CC), CMGI Inc. (CMGI), Dynatronics (DYNT), Fonar (FONR), Hi-Shear Technology (HSR), Marshall Edwards (MHSL), Napco Security Systems (NSSC), Steelcase (SCS), TRC Companies (TRC) and Walgreen (WAG).

The following economic reports are due today: August Personal Income (the consensus expects 0.2%), August Personal Spending (the consensus expects 0.2%) and September Dallas Fed Manufacturing Production Index.

Fortis NV, a Dutch-Belgian bank whose roots date to the 1800s, is on the verge of becoming the latest target of a government rescue according to the Wall Street Journal. And Wachovia Corp. (WB) is the subject of discussions with Citigroup (C).

Despite the creation of a rescue plan that was contentiously agreed to by the president and Congressional leaders, it is not certain that it will be supported by the full House of Representatives, thus markets are down this morning.

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Sam Collins can be reached directly at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.