by Sam Collins 03/17/08
On Friday, financial stocks took a major hit following the news that one of the once-premier firms on Wall Street, Bear Stearns (BSC), said that it was receiving help from JPMorgan Chase (JPM) and the Federal Reserve to alleviate its liquidity crisis.
Traders had a difficult time remembering when such a situation had occurred -- where the Fed agreed to bankroll a firm that was taking over another -- and the speed of the decline in BSC came as a shock.
Other Wall Street firms' stocks were hit hard, with Merrill Lynch (MER) falling almost 6%, Lehman Brothers (LEH) taking almost a 15% fall and Citigroup (C) dropping 6.1%. But, as might be expected, the biggest loser was BSC with a loss of 47%.
Despite the upsetting news from Wall Street, the markets opened higher on a flat inflation reading for February. Some economists questioned the data, which showed a 0.5% drop in energy prices. However, according to other economists, the government survey was done at the beginning of the month and prices jumped after the survey.
With only Boeing (BA) showing a gain among the Dow Industrials (DJI), the average fell 195 points to 11,951. The S&P 500 (SPX) lost 27 points, closing at 1,288, and the Nasdaq (NASD) was off 51 points and closed at 2,212.
The New York Stock Exchange traded 1.8 billion shares, with a negative breadth of 5-to-1. On the Nasdaq, 1.3 billion shares were exchanged, with decliners outpacing advancers by 3-to-1.
Crude oil for April delivery fell 12 cents to $110.21 a barrel and the Amex Energy SPDR (XLE) lost $1.39 at $74.76. Gold futures hit another new high, with the April contract rising $5.70 to $999.50 per troy ounce. The PHLX Gold/Silver Index (XAU) closed at a new record of $206.37, up 99 cents.
For the week, the Dow Jones Industrial Average gained 0.5% (off 9.9% for the year), the S&P 500 was down 0.4% (off 12.3% for the year), and the Nasdaq was even for the week (off 16.6% for the year).
What the Markets Are Saying
Even though the major stock averages managed to pull off an "almost-unchanged" status for last week, each failed to reach the peak of its last rally and, in fact, performed a reversal on significantly high volume. In addition, the both slow and fast stochastic indicators flashed new sell signals, and momentum on each is in the oversold area, but not excessively oversold.
This last indicator is especially nasty, since it could run lower by about another 5% before becoming oversold. But there was one technical bright spot: The intraday lows made on Jan. 22 have yet to be exceeded. However, new closing lows were set by every major index, and most technicians consider this a most-important indicator.
Throughout the week, the "safe havens" in times of severe crisis -- namely gold, other hard commodities, and U.S. Treasury securities -- were strong. That "flight to safety" can pull more potential buyers out of the market, leaving even more sellers on balance. With a lot of fear and uncertainty surrounding the ownership of almost all financial stocks -- and a greater likelihood that other revelations are in the wings -- we remain bears.
You've heard it from me before but it "bears" repeating: Successful investors in a bear market must think like bears. In other words, every piece of news and information must be processed in the context that the overall market is in decline. You should sell into all rallies, short-sell stocks, and buy only those few sectors that benefit from a bearish outlook.
Today's Trading Landscape
Earnings are expected from the following companies: 4Kids Entertainment, ABX Air, Acusphere, AES, Alexza Pharma, American Apparel, American Bio Medica, Applied Digital Sol, Aurizon Mines, Ballantyne of Omaha, Basin Water, Bear Stearns, Bioject Medical, BMP Sunstone, Brooke, Bruker, Carmike Cinemas, Cash Systems, Century Casinos, Conseco, Cosi, Emeritus Assisted Living, Environmental Power, Excel Maritime, FirstCity Financial, Flotek, Fortress International, GeoMet, Goldleaf Financial, Hollis-Eden Pharma, Hythiam, Majesco Entertainment, Medis Tech, National Atlantic, Neurogen, ParkerVision, Shuffle Tech, Southwest Water, Sun Communities, Syntroleum, The PMI Group, Transmeta, Venoco, Vicor, WCI Communities and WPCS International.
The following economic reports are expected (Eastern Time):
* 8:30 a.m. -- the March N.Y. Fed Manufacturing Report. The consensus expects negative 7.4. The previous figure was negative 11.72.
* 8:30 a.m. -- the Q4 Current Account Balance. The consensus expects negative $184 billion. The previous figure was negative $178.5 billion.
* 9 a.m. -- the January Treasury International Capital Flows. The previous figure was $45.2 billion.
* 9:15 a.m. -- the February Industrial Production. The consensus expects negative 0.1%. The previous figure was positive 0.1%.
* 9:15 a.m. -- the February Capacity Utilization report. The consensus expects 81.3%. The previous figure was 81.5%.
* 12 p.m. -- the January Chicago Fed Midwest Manufacturing Index. The previous figure was positive 0.1%.
* 1 p.m. -- the March NAHB Housing Market Index. The previous figure was 20.
The big news today is the government-sponsored fire-sale of Bear Stearns to JPMorgan Chase for a mere $2 a share ($236 million), as well as the cut in the discount rate. The Bank of England is holding a special "fine tuning" operation this morning and world markets are sharply lower as a result. Domestic markets will no doubt open much lower, too. The big question now is, "What's next?"
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'Irrational exuberance' has hit the energy markets. Be cautious about new positions in the sector.
Tuesday could have provided a pivot point as the SPX, the NASD and the DJI gave important signals.
Now under its 50-day moving average and its stochastic indicator undervalued, ENB looks like it could jump.
All eyes should be on the VIX and VXN for the buy signal (if one is to come).
AUY could break higher, but you should limit risk with a stop-loss.
