Tuesday, December 18, 2007

"Volatility" or "Are the Horses Out of the Barn?"

Top Line: The stock market spent some time doing big zigzags on Tuesday which represents extreme volatility. To us, this is not a bullish sign. People don't like to see this type of action because they think the market should only go up, not down up down up. Our position did not change on Tuesday and it says that the Dow is headed towards 12,500.

In our last post we mentioned that the ECB (European Central Bank) was offering unlimited funding to the banks in the Eurozone. When we read unlimited we thought maybe that was a little far fetched but today's report that the banks eagerly scooped up over $500 billion proved that they weren't kidding. The ECB is providing funding for needs over the critical year end reporting period.

That news set the US stock market on fire at the open on Tuesday and the Dow jumped nearly 100 points at the outset. By midday, the gains vanished and the Dow sported a 75 point loss before going on a 180 point tear before losing a little steam going into the close, up about 65. This journey logged about 500 points and is the definition of intraday volatility. We have seen more intense volatility but Tuesday showed how fickle the market can be.

The other news was from Goldman and Best Buy which should have been well received by the market but really wasn't, at least not right away. When volatility gets going, the sins of the past hour can quickly be transformed. The market has little awareness of what was going on over an hour ago. But, we digress...

The last item is from the bowels of the Fed. They are proposing changes to mortgage lending.
The changes are mostly things that should have been in place without government or regulatory intervention, like getting people into the right mortgage or house rather than setting them up for foreclosure--sort of like closing the door after the horses are already out of the barn. The bottom line is that the proposal is just one more reason for lending to slow down. The mortgage industry is not going to get a break.

FSI: 101.37

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