Sam Collins

Momentum Back in the Markets

by Sam Collins   10/14/08

So far, this bear market has been notorious for its excesses, with most of those on the downside. But Monday a new record number of the Dow Industrial (DJI) was scored with a victory for the bulls, as the 30-stock average soared for a gain of 936 points. It was a remarkable achievement despite the drubbing that the markets have taken recently.

It was the fifth-largest percentage gain, with each of the major indices gaining more than 11%. The catalyst for the rally appeared to be central banks' global efforts to help the financial markets by providing as much dollar liquidity as needed to fund the short-term markets. The United States is expected to outline a comprehensive plan today that would include interbank lending, bank debt guarantees and direct capital injections in financial institutions.

As part of the U.S. plan, the government will buy preferred equity stakes in many of the key banks and investment banks to tie the banks to the federal government. The result is that taxpayers will have a direct stake in the future of the banking system and be able to place restrictions on some criticized practices like executive pay and so-called golden parachutes.

General Motors (GM) was the biggest winner on the Dow, up more than 33% after reports that it was considering a merger with privately-held Chrysler. The auto giant said it has also had talks with Ford (F) about a consolidation that could help the nation's ailing automobile industry.

Crude oil rose yesterday and that helped to spring the energy group, which has been in a slump for weeks. Exxon Mobile (XOM) gained 17.2%, Chevron (CVX) was up 20.9%, and Chesapeake Energy (CHK) rose more than 22.2%.

At the close of a session in which only part of the financial industry was working due to the Columbus Day holiday, the Dow Jones Industrial Average (DJI) rose 936 points to 9,388. The S&P 500 (SPX) gained better than 104 to 1,003 and the Nasdaq (NASD) gained 195 points to close at 1,844.

The volume-diminished session still managed to trade 1.8 billion shares on the New York Stock Exchange, with gainers ahead by a margin of 19-to-1. The Nasdaq had volume of almost 1.2 billion shares and advancers there were ahead by 6-to-1.

Crude oil (November contract) gained $3.49 to end at $81.19 a barrel, and the Amex Energy SPDR (XLE) reversed sharply from Friday's under-$40 intraday high closing at $50.55, up $7.15.

Gold for December delivery fell $16.50 to $842.50, and the PHLX Gold/Silver Index (XAU) rose $3.93 to close at $104.49.

What the Markets Are Saying

After last Friday's "almost reversal" and better financial news during the weekend, the markets exploded as if an enormous compressed spring had suddenly been released.

Within minutes on Monday, the Dow (DJI) was up 400 points before some modest profit-taking took back some of the gains. By 11 a.m. Eastern, more buying hit the trading floors, and it was clear that even without the participation of a major segment of the institutional crowd, this was not going to be another day down.

Due to the holiday, the bond markets and banks were closed, but volume poured in from, not only small investors from this side of the pond, but also from some of the major European and Asian players, too. So even without the normal institutional participation, volume on the Big Board still crossed 1.8 billion shares.

Just before the close, buyers poured in again, closing the major indices almost at their highs of the day. This indicates that the momentum dramatically shifted, but the CBOE Volatility Index (VIX) dropped almost 15 points to 55 from a high of 77 indicating that, despite the explosion, the rally may not be able to be sustained for more than a day or two before falling back to a more normal pattern and some backing-and-filling.

Traders may want to hang on to some of their quick gains just to see what impact U.S. institutions might have since momentum is now on their side and the first real resistance doesn't come into play until Dow (DJI) 9,660 -- the Dow closed at 9,388.

But don't blink -- at yesterday's rate of climb, 272 points is about 15 minutes of market action.

The overall trend is still down but, yesterday, the bear took a solid hit as stocks confirmed Friday's late-in-the-day turn from a "deep V" low and rallied after breaking historically sold-out numbers from virtually every sentiment indicator. A high-volume run against the overhead and then a successful test of last Friday's low will tell us whether that hit was solid enough for a kill, or if it was just a glancing blow.

Today's Trading Landscape

Earnings to be reported include: Adtran (ADTN), Altera Corp (ALTR), Bank of the Ozarks (OZRK), Century Bancorp (CNBKA), CSX Corp (CSX), ECB Bancorp (ECBE), Enzo Biochem (ENZ), Genentech (DNA), Great Atlantic & Pacific Tea (GAP), Intel Corp (INTC) and Johnson & Johnson (JNJ).

Linear Technology (LLTC), Pacific Continental Corp (PCBK), Peoples Educational Holdings (PEDH), PepsiCo (PEP), Polaris Industries (PII), Supervalu (SVU), Synergetics USA (SURG), USANA Health Sciences (USNA), W.W. Grainger (GWW) and Zep (ZEP).

The long economic report due is the ABC/Washington Post Consumer Confidence for Oct. 11.

The world's stock markets followed the U.S. lead with Japan's Nikkei up a record 14%.

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