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Today's Market WrapUp 09.16.2008 Mon Tue Wed Thu Fri Barbera Archive What Next for AIG and the Markets? For the last few days, the US Financial system and perhaps, the global financial system, has moved to the brink. Events surrounding American International Group (AIG) seem to have brought this crisis to a head. A global titan with operations in over 130 countries, AIG’s insurance business has counter-party risk relationships with virtually every major institution in the world. Words probably cannot accurately depict how serious a problem the implosion of a company this large would be for the greater financial community. Thus, it is putting it mildly to suggest that at the moment, a great deal depends on whether AIG can receive the funding it needs to avoid a further downward spiral. Such a spiral would undoubtedly trigger a torrential chain reaction of counter party defaults in the CDS market which stands at more then 40 Trillion in notional value. In the case of the demise of AIG, the word ‘melt down’ is of the few terms that would apply with ripple affects spanning the globe. Thus, as markets wait to see if AIG can bypass its liquidity problems, it is very clear that a large move, either straight up (sigh of relief), or straight down (abject terror) is in the offing. At the moment, it is impossible to tell what will happen, although it appears that Uncle Sam has pressed several institutions including Goldman Sachs, Morgan Stanley and JP Morgan, into service in an attempt to provide stop gap measures for AIG. IF this is successful, markets could gap higher in the near term, and shorts could end up being squeezed, and perhaps squeezed in very dramatic fashion. A 500 to 600 point up day in the DJIA would not be out of the question. Looking back, we have seen these types of dramatic short squeezes occur several times in the last few months, most notably in the banks just a few weeks ago. In the more bullish outcome, where AIG obtains the needed capital, the markets would rally but it would NOT mean that the crisis is over, nor would it even likely mean that the stock market bottom has seen a final low. Hardly. What it would mean is that one bullet among many has been dodged and the ultimate day of reckoning has been postponed; that valuable time has been secured. Former AIG head Hank Greenberg talks of AIG as being important enough to the national interest to preserve the company, and he is probably spot on as for years this institution has been central to the financial world. However, in the end, the problems for a crippled US Financial System will continue to center not around AIG, but around falling collateral values tied to the US Housing sector, which is a trend that is unlikely to reverse for some time to come.
Above: GST Oil Service Index with Medium Term ARMS Index remains heavily oversold
Above: Oil Service Stocks with Summation Index moving down to fully oversold condition as prices near the lower band.
Above: ARMS Index for GST Oil and Gas Stocks. Plotted inversely, this gauge reflects an oversold condition when the indicator is near the upper horizontal line as it is now.
Above: Oil and Gas Stocks with long range Summation Index down to oversold levels with
In addition to the energy sector, we see that the Natural Resource sector – taken as a whole and including Refiners, Precious Metals, Base Metals, Coal, Nuclear etc. - is at the present time pushing the ultra low end of the historical range. In the chart below, I update a chart of the GST Stagflation Index, an index made up of 150 stocks from all areas of the natural resource world. On the bottom clip is a composite overbought/oversold indicator which is the sum of many indicators for this sector. Note the current readings well below –5.00 which is the fully oversold threshold. As a collective universe, resource stocks at the current time are as oversold as they were at the very major 2002 market bottom, which should give investors a great deal of heart in order to hold on just a little bit longer. While the action of the last few weeks has been at times inconceivable, the degree of technical compression in these markets is at levels rarely seen, implying a coil spring. Once the tension unwinds, it will unwind very rapidly, and for the share prices, that should imply a strong recovery dead ahead. Of course, AIG remains a major wild card as at least in my view, the only outcome which could really serve to depress these stocks further would be a 1929 style stock market crash with margin selling, the works. Absent that, the recovery bounce should be well worth holding for and to this point, critical support levels have held.
Above: GST Stagflation Index with Detrended Money Flow gauge at second most oversold daily reading ever seen. Can this really stay at these levels for any meaningful period of time?
Above: FSO Junior Gold Stocks with McClellan Summation Index closing in on –1,000, unprecedented, literally off the chart oversold. A final snapshot of the resource stocks appears in the charts shown just above. Again, we are seeing readings that are rare and virtually impossible to sustain. For resource sector investors, any breather in here should translate into a mighty recovery bounce. That’s all for now, Frank Barbera Copyright © 2008 All rights reserved. CONTACT
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