Market Washout: Morgan Stanley, National City Won’t Play Along

The Federal Reserve has been working overtime, yet the markets are not respecting its hard work. It is the sign of an economy run amuck.

Bernanke’s moves this week are strong and smart, yet the equities market continues to remain weak.

I have no doubt, however, the Fed’s moves will pay off. It may not happen today and it may not be next week, but thanks to the government’s swift action, the American market will rebound faster than our foreign counterparts.

Today’s coordinated rate cut with a handful of central banks from across the globe brought some buyers back to the markets. But the action has not been enough to really get the bulls running. The lackluster activity comes as no surprise. After all, we all knew after Bernanke’s speech yesterday a drop in rates was almost a certainty.

Green is not always good

Some market experts are actually hoping for a big market downturn today. Their theory is a washout (a large share price plunge on above-average volume) would clear the markets of bearish sentiment and help mark the bottom of this financial crisis.

Instead of whipsaw action from hour to hour with a downside bias, they believe me need one solid plunge on large volume followed by a serious influx of buying activity. Once buyers started moving in, a market bottom would be created and we could concentrate on putting this mess behind us.

Judging by this morning’s action, a pure washout is not in the cards today. Equity valuations remain relatively flat and buyers are trickling into the market. The action is fairly weak however as declining stocks continue to outweigh advancers by nearly three to one. The good news is advancing volume is greater than downside volume, but not by much.

Some of the most active trades today come as no surprise. National City Corp. (NYSE:NCC), a bank making virtually no headlines, remains highly volatile. Share price was up by as much as 12% today, with over 23 million shares changing hands in just a few hours.

Another company getting plenty of attention today is Morgan Stanley (NYSE:MS). Its share price plunged yesterday on fears its capital infusion from Mitsubishi UFJ would not clear regulatory hurdles.

Today, both companies assure the Street the deal is finalized and the only thing holding it back is the Fed’s mandatory waiting period. When that ends next week, the deal will be done. Shares of Morgan Stanley are selling for just under $19, up from lows near $15 yesterday. Savvy options investors are raking in the profits today.

Bernanke and his boys are plugging the leaks as they occur. Until it is obvious they will be able to keep this ship from sinking, the volatility will continue.