Has the Bailout Helped?

Includes: DIA, IWM, QQQ, SPY
by: Toro

The market did hold.

This one, we have to give to the bulls.  Yesterday at 2 p.m., after the margin sellers were finished doing their thing, the buyers took off and ramped up the market. 

Volume was huge, with NYSE Composite volume at 7.2 billion, the fourth heaviest of the year. 

However, breadth was a mere 1.75:1 on the upside, at least according to Bloomberg. It seems that huge buying in financials and consumer stocks were met with huge selling in industrials and commodity and energy stocks. One would want to see breadth at 9:1 on the upside or higher to be ragingly bullish. 

Bank stocks broke out of their near-term range but ran right into resistance when the Bank Index [BKX] hit 73.2.  Banks have to break through here.

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BKX 08 09 08

Small cap stocks – which I am short – were up, but not as hard as the broad market.  At this point, until there is further evidence, it appears that small caps are tracing a top before heading lower. 

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IWM 08 09 08

The behavior of the VIX was not also particularly comforting.  The VIX did drop yesterday, but it was higher until a half hour before the close, even though the Dow was up 240 points at 3:30 p.m.

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VIX 08 09 08

If investors are embracing this move, why was the move in the VIX so tepid and the upside volume relatively weak?

The bailout is positive and was inevitable.  However, one should not get too enthused. Yesterday’s move lowered mortgage rates by 0.50%, which is certainly good, but does not dramatically increase affordability for home buyers.  Home prices have to continue to fall or incomes have to significantly rise until homes are affordable again. 

And there is still a ton of housing supply out there.  That did not go away yesterday.

One of the biggest positives of the bailout – apart from removing some systematic risk in the banking system – is that it averts a crisis amongst foreign bankers (the bailout, by the way, is not being universally embraced).  The bailout stems a buyers strike on agency debt, which was beginning to happen as shown in the most recent TIC data.  Had foreign buyers started dumping agency debt en masse, mortgage rates could have spiked, imperiling the economy further. 

The economy is still anemic, but we have to be careful when assessing the market relative to the economy because stocks bottom before an improving economy becomes apparent.  Is that happening now?  I don’t think so but we must not be so dogmatic and rigid in our thinking to dismiss that the economy has not bottomed here. 

I am trying to stay open-minded about this move.  As I said yesterday, to become more positive, I want to see follow-through this week.  For the moment, I am doubtful.