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A Tale of Two Markets


The difference between stocks and credit.


The credit markets are saying one thing, while the stock market is saying something differently, particularly in the financial space today.

Rumors are floating around that Wachovia (WB) will be bought by a foreign bank (I suppose that this could happen eventually but at lower prices) and that HSBC (HBC) will bid for UBS (UBS) (what HSBC would want with UBS and its mess of a balance sheet I don't know). But, like they say, "If you throw a dead cat off the top of a building, even it will bounce," so here is the dead cat bounce in stocks.

I see bid list after bid list by forced sellers (CDO liquidations and financial institutions, including hedge funds trying to slim down their balance sheet by quarter end). This is rational behavior. I also see most hybrids and preferred stocks of every major financial institution trading in the 8 3/4-9 1/4% area, yet stocks rally. What gives? The credit market most likely has it right, but stocks are more emotional, and hence the bounce.

I learned a couple of valuable commandments from Todd Harrison in the past couple of years as we have gone down this miserable path called the credit crisis:

  • Never let your trading get in the way of the big picture.
  • Never let the big picture get in the way of your trading.

BKX 60 was a logical spot and everyone knew it, particularly that enormous buyer of E-Mini's that showed up at 60.01 BKX. This is no coincidence as institutions are programmed to buy at these levels. A trader would simply buy at 60 and use a closing price under 60 as his stop, or defined risk point. See the chart below.

Click to enlarge

However, many folks are stuck "shorting into the hole" in the stocks while the credit markets reflect the true fundamentals. This action should come as no surprise as the stock market is a much more emotional market than the credit markets, which see absolutely no improvement in actual fundamentals, which are not improving and not likely to anytime soon.

So while I respect the move in the banks, and I suppose BKX could rally to 70-73, I remain steadfastly negative on credit, which is where I spend the bulk of my time.

In the end, BKX 60, will become resistance.

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No positions in stocks mentioned.

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