Turnaround Tuesday???

Market Action:
As the US markets opened after the weekend, the global sell off was beginning once again, but, as we have seen so many times, the early morning lows brought in some buyers and before long the indexes were green.  The Dow, which started with a 75 point loss had erased those and created a green plus 70 for a 145 point turnaround.

Shortly after that the market started to leak and, except for a rally attempt in the afternoon, the Dow faded into the close, closing very close to the lows of the morning.  That was quite a trip for the Dow, down 75 at the open, up 145 into the morning highs and then down 130 into the close.  

Besides the Asian market sell off, there was some other news that disturbed part of the market.  Late last Friday, one of the subprime lenders, New Century Financial (NEW), said that it is under criminal investigation by the SEC and it will likely breach a major lending covenant.  Some analysts are predicting the demise of the second largest US subprime mortgage lender.  

At about the same time, another subprime lender, FMT, Fremont General, said it was looking to sell off its subprime mortgage business.  This sale was prompted by a proposed order it received from the FDIC.  

As for NEW, today’s trading hit it pretty hard, down about 70% to 4.56 a share.  NEW had traded around 65 about two years ago and it was right around 30 for the month of January.  FMT didn’t fare as badly, down over 30% on Monday to 5.89 after trading in the 20’s for the last couple of years.

Opinion/Analysis:
As we write this, the overnight futures are trading noticeably higher, which makes sense given the nature of the sell off over the past week.  The market is oversold and at some point will need to rally.  We wrote about the rally last week taking the Dow back up into the 12,500 area.  We have some reason to think that the rally could finally be here.

Here comes the other side of the story.  We have made statements in the past about the way down markets work, the real selling starts After the market is oversold.  Well, Friday the market showed us that it is oversold but Monday there was very little that looked like a rally, especially looking at the closing prices.  On Monday, there was some additional selling and the market went deeper into its oversold condition.  

The point of all of this is that the market is oversold and if a rally doesn’t start on Tuesday, there is a good possibility that the market could go down hard.  We think the probability is low for this event at this time but we know that surprised are going to happen to the downside now that the market has turned over.  We think the market will try to confound more investors over the next few days and rally out of this low that has formed near 12,000, sort of bouncing off the big round number in the Dow.

This first rally after the big fall is supposed to be strong in order to convince most that the break was a false break and now we’re off to the races again.  That would mean that a rally would be a normal thing for the market.  The problem with that theory is that that the market wants to go down as we saw on Monday and if it wants to go down, it will.

Monday’s technical picture was very weak with volume heavy again, although not quite 2 billion shares on the NYSE.  The volume was heavily skewed toward declining shares with less than 10% of the volume in advancing shares, similar to last Tuesday’s decline but not quite as bad.  Tuesday had about 1% of the volume in advancing stocks.  

Dow Industrials:  12,050.41  -63.69
VIX: 19.63
HUI:  314.86
QQQQ:  42.15
RYVNX:   18.28
RYAIX:  22.17
RYCWX:  38.23
TLT:  90.35
BEGBX:  13.82