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Now It's a Fight!


The market turned neutral but at least now it's a fight!


Three days ago, when I was on the phone with a notable financial journalist, whose name I withhold by request, we were speaking of market sentiment. I mentioned to this friend that we weren't seeing a fight from the bulls as the markets and the bears overwhelmed them.

My observation of the action was that bulls had pulled back and none among them was stepping up to fight the trend, especially with the DJIA within 2% of a 10% correction. Every time they (the bulls) felt the pressure coming from the bears, they pulled their bids back and we hit a vacuum, or freefall. I pounded the table, saying the bulls would not make a stand until we hit that 10% level. Then we'd see a fight. Until then the bears would prowl and growl and drive the market at their whim.

I said that because the bears had demonstrated clear dominance, spreading rumors of this homebuilder or that financial stock filing for bankruptcy. The street was running with blood as they tore their way through Beazer (BZH), Countrywide (CFC) and Etrade. But when we hit that down 10% level a funny and, I feel, very predictable thing happened. The bulls made a stand. The bears pushed and the bulls pushed back!

The result was the bears, who had become overconfident, were stunned that the bulls were making a stand. The S&P 500 rallied, the DJIA rallied and the QQQQ rallied dramatically, as the bulls turned an extremely bearish 2.7:1 put / call ratio around to finish with a 1.9:1 put / call ratio.

Then, just as the bears were licking their wounds, Ben Bernanke proved he truly understands markets by making that 50 bps cut in the Discount Rate. This was genius for three reasons:

1) It left another 50 bps on the table if he needs it for a future cut.
2) The Fed Funds rate is still in play and the powder here is still dry.
3) The timing of the cut hit the bears right in the solar plexus, or maybe just below that!

The timing was indeed key, as if the Fed had cut at 3:30 pm with a half hour to trade, the markets would have rallied, and everyone would have talked about it all weekend, but coming as it did before the open, the cut in the Discount Rate crippled the bears, as their expiring August puts vaporized and short calls exploded.

This cannot be oversold. The hit was not one that you can trade your way out of. The hit to those expiring August options is a crushing blow that changed sentiment.

Evidence, Doc? Sure, take a look at the put / call in the S&P 500 options right now. Today that same index is 1.6 to 1, which represents how dramatically sentiment has changed. This is not to say that the market turned bullish. No, the market turned neutral but at least now it's a fight!

No positions in stocks mentioned.
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