Daily Review: Fed's Additional $800 Billion Props Up Markets

Blue chip stocks have initiated new short-term uptrends while the tech-heavy Nasdaq and small cap Russell 2000 lag and remain in downtrends. Tuesday marked 3 consecutive up days for the stock market as volume declined -13% on the NYSE and -9% on the NASDAQ exchanges. Some may attribute this to waning momentum, but the abbreviated trading week due to the Thanksgiving holiday is also playing a role in lighter trading.

The big event for the day was the Fed’s announcement to inject an additional $800bn into the emergency funds program. $600bn will be used to buy debt from federal mortgage agencies while the remaining $200bn is targeted for loans to holders of asset backed securities, e.g. those backed by credit cards, auto loans, student loans, and small business loans. This news had a positive impact on certain components within the Homebuilders (XHB), Materials (XLB), and Financials (XLF) exchange traded funds.

The FDIC’s list of problem banks grew to 171 in the 3rd quarter vs. 117 in the previous 2nd quarter. The list of troubled banks is fast approaching the 1995 high of 193, which is likely to be surpassed as economic conditions deteriorate.

President-Elect Obama, with support from congressional Democrats, is likely to pursue a stimulus package at least 3x larger than what he orginally proposed and direct it towards infrastructure and job creation. Meanwhile, he continues to fill cabinet positions with the announcement of his new budget team. The market is being reassured that the economy is his top priority as merit precedes party affiliation in his selection process.

Economic Indicators were mixed: On the rebound was Consumer Confidence bouncing higher than expected at 44.9 vs. 38 consensus and 38 previous month. Revisions to 3rd Quarter GDP were slightly lower at -0.5%, to further confirm the recession. Corporate profits declined -9.9% annualized for 3Q 2008. Case-Shiller data for residential real estate show that prices declined -16.6% nationally and continued weakness in the 20 top metropolitan areas.

For now, this is a bear market rally, as the primary trend for equities remains downward and bearish. It is very much possible for stocks to become overbought in short-term time frames while the market direction of the major trend is down. There appears to be a rotation of capital occurring in various asset classes. Gold and the Euro are in relatively new uptrends while the U.S. Dollar and Japanese Yen have begun short-term downtrends. If the dollar’s downtrend persists, this would be favorable for large-cap multinational stocks. (For more detailed analysis of market trends and support & resistance levels, please see Hillbent’s Market Condition Summary Report.)