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Minyan Mailbag: Explaining the Market Reaction to the Bailout

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Presently, there are few trading opportunities.

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Prof. Sadana,

Do you have an opinion on the market reaction to the bailout news?

-Minyan Brian


Minyan Brian,

I have been engaged in discussions about the bailout with many smart Wall Street minds. We are living history; this is something we might look back upon with disbelief. But in my world, intellectual stimulation and trading actions remain segregated. While I believe that no one would like to shoulder the blame for a market meltdown in case we don't get the promised bailout, and hence the chances of some news this weekend remain very high, I am waiting for the omni-prescient markets to endorse this bailout with a euphoric reaction before stepping into the markets in any big way.

Even though we are on the verge of some historic market moments, I don't see too many trading opportunities. I don't see many long trade set-ups (except for a holding time of a few hours) and I certainly, am not comfortable shorting (lest they temporarily ban all-shorting or vicious snap back rallies occur). Here are some pros and cons in the recent market action.

Pros:

  • Volume picked up slightly on Thursday; we might be setting up for a positive retest of September 17th lows.

  • Semis are holding up for the first time in many weeks, contrary to earlier times.

Cons:

  • Volume pickup on Thursday was nothing to write home about.

  • Credit markets are still under considerable stress and that remains one of my biggest worries.

  • Breadth in yesterday's rally didn't seem like the start of something new.

  • Even though General Electric (GE) was spared, the market remains in a punishing mode, as the Research in Motion (RIMM) proves with a 25% decline.

  • No major oversold signals yet and that's worrisome. One might argue, that the market could be internally doing better, which always happens in a bottom but if so, I need more proof)

  • The market is still lacking strong leadership; techs such as Apple (AAPL) and Google (GOOG) are faltering, financials as depicted by Financial Select Sector SPDR (XLF), while up from the lows, remain undecided, Agricultural Chemicals such as Potash (POT), Monsanto (MON), Mosaic Co. (MOS) are close to lows, stocks that are backbone of the economy such as Caterpillar Inc. (CAT) and Deere & Co (DE) are at lows, Steels like United States Steel Corp. (X) and Arcelor Mittal (MT) are carving out new lows. Where's the leadership?

Bottom-line:

The fallout of a bail-out: The market will confirm!

  • The quarter end mark-ups might be starting. But if I were a fund investor, I would have loved to see huge amounts of cash in my account. Wait a minute! That might be what the funds are doing, with 'mark-downs' this quarter!

  • The earnings warning season is upon us.

As the title of Cornel West's upcoming book suggest, in the current markets, hope remains on a tightrope. I am confident than once we get the green signal there will be enough time to make money. Daily 300 point moves in Dow over the past 2 weeks without any serious oversold signals can just chip away at a portfolio, without any major sign of ensuing bounce. I remain a reactive trader, than a pre-emptive trader! Good luck.

Sincerely,
Prof. Sadana

No positions in stocks mentioned.

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