Massive Government Intervention Has Bulls Cheering

Includes: DIA, QQQ, SPY
by: Kunal Vakil

Wow!  As I write this, the S&P futures are up 33 points with the Dow Jones futures being up nearly 300, and Nasdaq 100 up 38.  The market is all cheered up over the news that Freddie Mac (FRE) & Fannie Mae (FNM) are going to be taken under conservatorship by the Federal Government.  It appears that this news was leaked in the final hour of trading on Friday as the market, and especially the financials started rallying pretty strongly into the close.  Daniel Mudd and Richard Syron, the two CEOs, will be replaced and I am sure that many more senior executives will follow the same fate in the weeks to come.  With this move, mortgage spreads should tighten and the US dollar should start to tank which is bullish for gold.

Conservatorship is basically similar to Chapter 11 bankruptcy and will render the shares nearly worthless.  The two GSE's had their credit ratings dropped to junk status on their preferred stock and we should see both companies trading on the pink sheets shortly.

With the news out of the way, what does that mean for the markets?  As you all know, I am bearish this market, expecting the 1165 to 1182 area to be challenged before a real bull market begins.  The market is basically within a 100 point range on the S&P 500 between 1200 and about 1300.  Even with the huge gap, the S&P will be well below the upper end of that range.  It is difficult to say what will happen Monday; I want to watch how this market does over the next few sessions.  It may be a two or three day affair in which shorts may get squeezed.  News driven events are typically always retested, at least. 

Is it possible that the lows of last week were in fact a double bottom in the form of a higher retest of the 1200 level?  Yes, it is, but I am not ready to proclaim anything at this point as we are still stuck in a range and I still do not believe that the market has put in the 9 month bottom yet.  Now, if this market puts in an ugly reversal tomorrow, we are basically looking at the potential for a waterfall decline.  Let's wait and see what happens in the early part of this week.  If the market tells us that we have to change our opinion, we will do it without any reservation.  I am not even close to changing my trend thoughts, but I want you to know I will if I have to.

We'll update more as we see it as of Monday's close.  Trade safely.

Stock position: None.