Thursday: A Day of Relief?

In some respects, Thursday was an historic day. I could write many words about how it unfolded, but I think you will get a better sense of its roller coaster session if I use several charts. Therefore, I have included the graphs below to illustrate my points for Thursday's market.

The first chart is of the Bank Index [BKX] that investors follow. Yesterday morning, the financials were under pressure again. The shorts were gunning for Goldman (GS) and Morgan (MS), as well as driving stocks like Citigroup (C) to new lows.

Around midday came the news that the FSA (in Great Britain) was banning all short selling of financial stocks in the U.K. until January. This is a crazy idea, but we are in crazy times. This sparked an initial short-covering rally in the financials, and the bank index rallied fully +25% from its lows. For the day, the BKX gained +13.8%. This is also important, notice that the bank index remains fully 50% higher than its July lows, despite the barrage of negative headlines.

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The next chart below is for the S&P Homebuilder ETF (XHB), which tracks housing stocks. This fund also bottomed midday, along with the financials, and began to rally. However, late in the day it picked up an extra head of steam when the news came out that Treasury Secretary Paulson was having high level meetings to discuss forming some sort of Resolution Trust Corp., like the one created to help get out of the S&L crisis in 1989.

That news gave a boost to the overall market, and especially any real estate related stocks. The XHB rallied +21% from its intraday lows and closed + 11% on the day. This index is also well above its July lows, as the market finally seems to think that a bottom in the housing market is within sight.

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The next chart is for the S&P 500 (SPX), which reflects how the overall market fared. The SPX made a new yearly low Thursday morning, but also bottomed with the FSA news, and then rallied more on the RTC rumors.

The SPX rallied +6.8% from its intraday lows, and closed up +4.3% on the day, on a big rise in volume. Thursday's rally didn't completely erase Wednesday's plunge, but we did close above Monday's closing levels (1192). From here, follow-through will be key.

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The next chart is of the Volatility Index [VIX], or what is called the "fear" index. The VIX often spikes when investors become fearful and panic selling hits the market. This was quite evident this week, and this morning, the VIX hits its highest level (42) since October 2002, the nadir of the last bear market.

Spikes of this nature have always marked a bottom in the market, at least within a short-period of time. It remains to be seen if this indicator will work again this time around, but today's action bodes well. Not only did the VIX spike to 42 intraday, but then it reversed lower into the close and declined a full -21% from its high.

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The last chart I want to show is of Morgan Stanley. On Thursday morning, MS fell by a huge amount, just like its investment banking brethren lately. However, when the market bottomed, MS came roaring back from its early lows near $12. The stock spiked up +100% and hit $24 with a half hour left in Thursday's session. I hope some shorts were badly burned on this one.

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I am going to save my comments on the idea of banning short selling on stocks. I am a "free market" guy, but given what has transpired in the market, I'll let the regulators try anything briefly, if it will help instill confidence back into the markets. We can talk about the moral hazards on the ethics blogs.

Today should be interesting, especially since it is the end of the week, as well as an options expiration day. I sold a little bit more of one of my hedges, the UltraShort Russell2000 ProShares (TWM), yesterday, although I still own some of both. I need to see more than one day of stabilization before putting cash to work, even as I see lots of bargains that have been created by the indiscriminate selling.

Disclosure: The author owns TWM. No other disclosures.

Comments

[2houndz:]

Another good reason the short the XHB.

2008 Sep 21 09:06 PM