Sam Collins

Bottom, or Bear Market Rally?

by Sam Collins   03/12/08

In a bold move intended to improve the financial market's liquidity, the Fed said that it will lend dealers up to $200 billion of Treasury bonds and bills for up to 28 days. The loans are in exchange for an equivalent amount of mortgage-backed securities. As a result, at yesterday's opening bell, the stock market took off like a shot with the beleaguered financial stocks leading the way.

Subsequently, the Dow Jones Industrials (DJI), the S&P 500 (SPX) and the Nasdaq (NASD) all recorded their best one-day advances since 2003.

Along with the loans of Treasury securities, the central bank said that it is increasing swap lines with the European Central Bank and the Swiss National Bank. It said that this is a coordinated effort with the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.

Financial stocks had the best day in more than seven years, up 7.4%, with Citigroup (C) gaining 9.1%. Some of the most-pressured mortgage companies had their best days ever, as investors made the assumption that the new Fed policies would save them from bankruptcy.

Thornburg Mortgage (TMA) was up 85 cents to $1.36, a gain of 119.7%, and Countrywide Financial (CFC) jumped 17.2%. Even though the financial markets are still in a high state of anxiety, the Fed's move was the catalyst for market rallies in Europe and Asia.

At the close, the Dow had surged 417 points, closing at 12,157. The S&P 500 gained 47 points to 1,321 and the Nasdaq rose 86 points to close at 2,256.

The New York Stock Exchange traded 1.9 billion shares, while 1.1 billion shares crossed hands on the Nasdaq. Breadth was a positive 5-to-1 on the NYSE and 3-to-1 on the Nasdaq.

Crude oil (April contract) fell $2.20 to $973.80 a barrel, and the Amex Energy SPDR (XLE) rose $3.75 to $76.60. April gold futures rose $2 to $976 per troy ounce, and the PHLX Gold/Silver Index (XAU) gained $9.56 to close at $198.61.

What the Markets Are Saying

It is true that "one sparrow doesn't make a spring," but the relief given to financial markets did cause a surge of buying, especially in the financial sector. It technically created a reversal within less than 100 Dow Industrial Average (DJI) points of the Jan. 22 reversal and within just seven points of that day's reversal for the S&P 500 (SPX). Volume was also impressive with 1.9 billion shares changing hands on the NYSE, which in recent weeks has been averaging around 1.3 billion a day.

Along with the high-volume reversal, a number of the internal indicators, including the slow stochastic and momentum, issued buy signals indicating that a modest rally is in the offing. Much of the volume, especially in the morning, was due to shorts rushing to cover. But following a modest lunchtime pullback, more volume hit the tape and drove prices to close near the high of the day.

However, as impressive as yesterday's action was, it did nothing in terms of changing the long- and intermediate-term trends of the markets -- even the short-term trend is still down.

But today will most likely open strong, and if the bulls can get things going, they might even be able to drive prices up to the first barrier, which is the 20-day moving average at Dow 12,457, S&P 500 1,341 and Nasdaq 2,293. Above that, there is some serious resistance, so the rally appears to be the beginning of a classic reaction bounce in a bear market.

Use the opportunity to lighten up in stocks that have been lagging and to get positioned in stocks in our favorite sectors; traders may want to decide on the next level to enter shorts.

Today's Trading Landscape

Earnings to be reported today: American Eagle (AEO), Gymboree (GYMB), Jo-Ann Stores (JAS), Hot Topic (HOTT) and Virgin Mobile (VM).

February's monthly budget statement is due today. The Congressional Budget Office said it sees $396 billion of red ink in the current year, up from $163 billion last year. So far, this year's spending is running $100 billion ahead of last year's, and $152 billion of "rebate" checks are about to be mailed. It will be interesting to see how this part of the spending-versus-investment theme and debate plays out for our society.

Yesterday's move by the Fed to lend dealers $200 billion was almost universally hailed as a positive development. However, today's focus will be on the follow-through to yesterday's stock market rally. Did we see a "V" bottom, or is this just another rally in a bear market?

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