With the announcement from President Obama that GM is getting one last chance before bankruptcy, it is completely off of the most actively traded stocks today (top 25 across all US exchanges). Interestingly, there are six financial stocks and four financial ETFs that are on the most actively traded list. Are traders considering the language the President is making towards GM may also be shared with a financial institution or two? Do the financials have one last, limited chance to “fundamentally restructure?” Bear Sterns, Indymac, Washington Mutual, and Lehman Brothers have failed. So where does “too big to fail” fall for Bank of America or Citigroup? The government could already own a 36% stake in Citigroup if they converted the maximum amount of preferred stock.
In my last wrap up, I stated on March 2nd,
“Eventually, there will be a trading bounce to play, but I think we’re in the midst of deleveraging: round II. I believe fiscal policy will continue to play a large role in the direction of our financial markets. We need some decisive moves that investors can really wrap their fingers around.”
I believed this because there was a lot of space between March 2nd and 1st quarter earnings for government policy to move the market.
- Starting on March 10th, Citigroup announced that it’s operating at a profit for the first two months of 2009. The S&P 500 rose 40 points and we started a bear market rally.
- March 16th, prompted by a congressional meeting the week before, announced new mark-to-market guidance suggesting the use of Present Value of cash flows (PV) to price illiquid securities and use judgment when valuing assets.
- March 18th Ben Bernanke announced more quantitative easing and a bigger balance sheet for the Fed.
- On March 23rd, Tim Geithner announced the Public-Private Investment Program (or basically TARP II).
It seems that these past weeks since March 10th have been a blur of “what are the best performing sectors” and “the bottom is in.” Rightly so, many technical analysts have pointed toward which sectors have performed the best, and they are the very same that begin to lift at a market bottom such as: cyclicals and technology. Additionally, the financial sector that has been blamed for a majority of the bear market has rebounded strongly off the March lows. This rally has been relentless without any recourse due to the continued rapid-fire moves by the government to flip the financial markets right-side-up. This rally has been engineered thus far, mostly by the government.
Before March 10th, the market was moving between two sets of emotions, hope and fear. There was a constant battle until the government interventions last month and hope came that the financials were “ok.” Reality sets in today with the announcement by President Obama that GM has one last chance. The best performing sectors last month are the worst today with financials at the forefront. Safe havens such as healthcare and utilities are down the least.
Source: TradeStation
The case today is that bad news has moved the market down. In bull markets, sentiment shakes off bad news. What I find so striking is that bad news for the U.S. auto industry has hit the financials so hard today. I think it mainly reflects the nervousness that investors have felt after they jumped into the market after March 10th. That nervousness was curbed by loose fiscal policy but it has reared its head today.
March 10th was the start of a tradable rally. It seems the hedge funds have already reversed their long positions according to a report from UBS about inflows and outflows here. April 2nd will be the FASB vote on changes to mark-to-market guidance. It may be that traders bought the rumor and have already begun selling the news. The trade may be down now in financials, but long-term holders such as mutual funds and pensions have started to invest here and net outflows from stock portfolios have declined on a four week average ending on March 20th.
Let’s say, for argument's sake, that we are now at the bottom of a new bull market. What is the personality of a bottom? In Elliott Wave Principle by Frost and Prechter, they write that recession bottoms appear during panic. A wave 1 rebound from the bottom is from undervalued levels where sentiment grows from the recognition of survival (such as from Citigroup on March 10th). Wave 2 is a “test of lows” and represents a fundamental condition often as bad as or worse than those of the previous bottom. The underlying trend is considered down and it does not create a new low.
We have yet to test the lows of this market and we have yet to make a Dow-Theory reversal. In Martin Pring’s Technical Analysis Explained, he writes the 5th rule of Dow-Theory, which is that “Bullish indications are given when successive rallies penetrate peaks while the trough of an intervening decline is above the preceding trough,” (pg 40). Essentially, we need a higher low and confirmation with a higher high. I think we should see at least the makings of a possible reversal in the next two weeks with a trough if the bullishness that the market is trying to grasp is for real.
A retest of the lows might be a lot harder to come by if the bullishness that propelled this market in March is the real deal. Either way, a higher low confirmed by a higher high is tantamount to the start of a bull market. Additionally, a break of the 200-day average is just as important. Since this rally started on March 10th, we have had neither. It’s also pretty sad when durable goods orders were up last week and the S&P 500 gained only 7 points.
