Sam Collins

Bears Continue to Prowl

by Sam Collins   07/14/08

The big story last week was the financial condition of Fannie Mae (FNM) and Freddie Mac (FRE), as intervention by the government topped the list of investors' concerns. On Friday, the two lenders fluctuated violently as their futures were bandied about in the press.

Then Secretary of the Treasury Hank Paulson sought to reassure investors on Friday and said, "Today, our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission." The Fed chairman even offered to open the central bank's discount window to them. But by Friday's close, both had lost more than 45% of the prior week's closing value.

Adding to stocks' volatility on Friday was a new high for crude oil as Iran's saber-rattling took its toll in all of the world's markets. Friday's new highs were especially hard to take following a sharp sell-off earlier in the week, with some traders saying then that the bull market in oil had reached a climax.

On Friday, the selling hit most sectors but, again, it was the financial sector that took the brunt. Lehman Bros. (LEH) fell 16.59% and Merrill Lynch (MER) was down 3.83%.

But there was some good news: Giant Dow (DJI) component General Electric (GE) was up slightly following Q2 earnings that met estimates. And Dow stock General Motors (GM) attracted buyers and was up 2.4% after setting a new low earlier in the day.

At the close, the Dow Jones Industrial Average (DJI) had fallen 128 points to 11,100. The S&P 500 (SPX) lost 14 points to 1,239 and the Nasdaq (NASD) fell 19 points to close at 2,239.

The New York Stock Exchange traded 1.7 billion shares, with breadth negative by 2-to-1. The Nasdaq crossed almost 1.1 billion shares and decliners just barely exceeded advancers.

For the week, the DJIA (DJI) was down 1.7%, the S&P 500 (SPX) was off 1.9% and the Nasdaq (NASD) fell by 0.3%.

On Friday, the August crude oil futures spiked to a new all-time high above $147 a barrel before settling at $145.08, up $3.43. The Amex Energy SPDR (XLE) fell 50 cents to $81.80.

August gold prices had another big day on Friday, up $18.60 to $960.60 per troy ounce, and the PHLX Gold/Silver Index (XAU) rose $7.71, closing at $195.08.

What the Markets Are Saying

With many of the key market indices below the important support of the March lows, it's easy to imagine that a major sell-off from Friday's closes could occur. But a closer look at the charts shows that the major indices all closed higher than the reversal lows of Thursday -- giving investors a tiny bit of hope from a very fragile indicator.

But those who are looking for a capitulation from a high-volume sell-off will be disappointed.

In fact, the lack of such a sell-off is a concern, and the relatively low readings from the volatility indices remain a problem. On Friday, the CBOE Volatility Index (VIX) closed higher by 1.90 but even with that, the index, now at 27.49, is still far from its needed reading of over 32.

In short, there still appears to be a lot of complacency with regard to the market's woes and as long as complacency reigns the bear will continue to prowl.

News, both good and bad, continues to spur volatile trading days and today will likely be no exception. Stocks will probably open higher but even if a temporary bottom is set at current levels, the enormous overhead of possible sales will more than likely limit rallies.

Today's Trading Landscape

Earnings to be reported include: Equity Lifestyle Properties (ELH), Genentech (DNA), M&T Bank Corp. (MTB), Macatawa Bank Corp. (MCBC), Novelius Systems (NVLS), PacWest Bancorp (PACW), Peregrine Pharmaceuticals (PPHM), Qiao Xing Universal Telephone (XING) and Stanley Furniture (STLY).

There are no economic reports scheduled for today, however there is major news: The U.S. Treasury and the Federal Reserve have agreed on a plan to back both Fannie Mae (FNM) and Freddie Mac (FRE). Anheuser-Busch (BUD) agreed to be acquired by InBev for $70 a share. The FDIC seized the assets of mortgage-heavy IndyMac (IMB) assuring investors that their deposits up to FDIC limits plus 50% would be backed.

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