Wednesday Outlook: How Far Can Bulls Take It?

We will do whatever it takes to stabilize financial markets.”
Hank Paulson
Treasury Secretary
March 16, 2008

And that’s exactly what they’re doing. I was watching the Bloomberg broadcast briefly as the interest rate decision was announced and one of the ex-Fed governor guests commented that during the last housing bubble in 1989-1991, the government allowed several thousand banks and S&Ls to fail and also stood by while Drexel Burnham failed. No bailouts with taxpayer funds.

However, the RTC [Resolution Trust Corporation] was created with the primary mission being the quick and orderly liquidation of all insolvent savings and loans while maximizing the amount of cash that can be obtained from the sale of acquired assets. So, there was an organized government effort to deal with the problem.

Obviously our current activist Fed and Treasury are more “directly” involved in the current housing and financial crisis than previously. It remains to be seen how it will all work out.

Tuesday was another short-squeeze in much the same fashion as the 400 point rally last week. In this one, the rotation was to financial stocks and away from commodities. Bulls believe the Fed has their back and Paulson’s comments are reverberating in my mind as well.

Volume was not that heavy with most coming after the Fed announcement. Breadth was very positive.

Financials led most of the action Tuesday, with no Fuld fold of LEH [as was feared] providing relief, FNM & FRE getting Fed help they craved, the Visa IPO being priced [$500 million in fees at stake], the Fed cutting rates further and so forth.
























































Has much changed since the last 400 point rally? Certainly events are different with BSC failing, Treasury and Fed activities, more interest rate cuts and so forth. I posted a chart of the last bear market annotated by powerful rallies as stocks, at least as measured by the NASDAQ, dropped roughly 80% from the high to the bottom.

I can’t even say we’re actually “in” a bear market at this point given the clearly indicated battleground lines that can’t seem to stay broken. Only time will tell if it is or isn’t. In any event, the chart below highlights these rallies.



Of course there’s more rock ‘n roll to this week as quad witching is ahead and who knows how that will go? I still believe it won’t be until Monday’s close when we have a clear trend picture. Tuesday was all about no collapse of LEH and a boost to FNM and FRE. In the meantime, for most equity markets we’re back in the box that’s been with us for nearly three months now and we’ll have to see how far bulls can take it.

Have a pleasant evening.

Disclaimer: Among other issues the ETF Digest maintains long or short positions in: SH, SDS, MZZ, MYY, IWM, RWM, TWM, QID, PSQ, IEF, UDN, DBC, DBA, USO, EFA, EEM, EEV, FXI and FXP.

Comments

[zenalgorithm]

David,
I truly enjoy reading your analysis of the daily market action. As a visual learner, I really appreciate the charts you put up. Thanks for taking the time to do this!

[Jack K]

I agree. The last one is amazing!

[fjd10595]

Good job.

[dunn]

Secular bear market!

[Chuck]

Spoiler Ahead....

I saw the movie and the Empire fails and the rebels win.

I believe Emperor Bush will go the way of Emperor Palpatine.

His own quest for power and control will cause his downfall.

but, that's just my view of future history...
The problem with the future is you have to wait so long for it.

[Earp]

A very interesting and informative article-but too much data to digest in one reading!

[phdinsuntanning]

USO rally maybe explained by more dolar supply...
RSX looks attractive,
David, you are gold !