Able to Leap Tall Buildings in a Single Bound

The stock market did its impression of Superman, and, on Wednesday, it did it twice. As the market opened, the NASDAQ Comp was on the move with a 2% up move in the first ninety minutes of trading. The Dow wasn’t quite so frisky but it too was up strongly by over 100 points in the same time. By late afternoon, the Dow sported a gain of nearly 200 points trading just shy of 13,700 with ninety minutes to go in the session.

For the next forty five minutes, the Dow fell into Negative territory briefly stunning many traders. Then, as if from nowhere, the market found a footing and the Dow moved back up about fifty points with about ten minutes left in the trading day. From there the Dow blasted up in the final minutes of trading to end up over 150 points on the day, 100 points up in the last ten minutes. So, at least it’s not dull out there in stock land.

Over in the bond market, there was mostly a drop going on in the Treasuries. This week is the quarterly refunding when bond dealers need to “buy” the debt the government wants to sell. The lead story on Wednesday was that China was on the verge of selling many of the Treasuries it holds in reserve which of course sent prices down and down hard. The ten year note, the one we watch with interest (yes, we know, it’s lame, but it’s the best we have this evening), got shelled for over 2 points pushing up the yield 11 bps for the day. That’s like a 1/8 point increase in mortgage rates, a big move for one day.

The credit markets are still in disarray, no matter what the soothing talk is on CNBC. Bonds of all kinds are having a bit of trouble in this market. The main “problem” from the US leaders is that pesky subprime issue but that should be “contained”. Well, we wonder if Alt-A, jumbo loans, count in their world. The reports are that rates on jumbo loans have Jumped to near 8% due to a re-evaluation of the creditors on this type of loan.

We don’t know what to say about the market’s movements late this afternoon because it all happened so fast. The reminder would be that these types of rallies are usually sharp but fail to have lasting benefit. Where the market is this evening is a dangerous place. We believe that the next few days will be equally treacherous for traders.

The Dow has come to our original target, 13,675, and has now traded around it, closing just below it. Wednesday’s action Feels like something to stay away from but we need to mention a few things. For those of you who think the market is now ready to move higher after “taking care of the problems” the economy faces, we say maybe but be very careful. There are now some of our indicators showing overbought, not very many but some. Most of them are just now getting out of oversold conditions, meaning the market may be ready to go back down. We can only recommend caution.

In the news today, TOL, the Toll Brothers housing concern, announced that its earnings were a tad better than expected even though revenues were down 21%. This rallied the stock 6% in the early going also providing some support to the overall tone in the market on Wednesday. This was in spite of the company saying that higher mortgage rates may slow their sales even more. According to the WSJ, the company says it has only “a very small number of subprime buyers, 43% of its buyers use so-called Alt-A loans, a category between prime and subprime. Lenders have severely tightened standards on such loans in recent weeks.” Where have we heard that before—well, not very many places since the “problem” is contained in the subprime market? Remember?

The market needs some close attention again and we are now going to see if our base assumption is correct, that being the bear has returned. The rally out of the utter oversold nature of the market has been pretty predictable. Now, we need to see when it will end. So many are saying that we are done with the sell off and we are now headed for new highs. Let’s just see about that. We think the market has topped as of mid-July so if prices move above those, we will reassess. For now, we think the market is pretty close to where it’s going on this rally phase, with the next major move being down.