Top Line: Here's another day that gave us ambiguous information so it's another wait and see day. We are still waiting for the market to tip its hand but in the mean time we are giving the benefit of the doubt to the Down trend. The rally needs to prove itself before we can get too excited about it.
The big dive on Thursday morning left nothing for traders to do except buy and buy they did. This day showed a large move down to open the session due to some bad news from a large hedge fund in the Carlyle Group's family. This fund had been "levered up" about 30 times its capital. Put another way, it had only 3% capital so a small move could virtually wipe it out and, guess what, there was a "small" move.
Before the market opened, retail sales were announced showing a dismal month of February. The expectations were for a slight improvement in this number but auto sales dragged down the number into the minus category.
These two "events" seemed to lead the market lower when it opened and it continued to slide until it was down about 2% across the board. Then, an amazing thing happened. The mortgage crisis lifted and the market no longer has to worry about it. (Does that smack of sarcasm to you? Well, if not, we thought we'd remind you that we do that sometimes.)
What really happened was the S&P declared there was a light at the end of the subprime tunnel. The market couldn't believe its ears. We started hearing the Munchkins singing "Ding Dong, The Wicked Witch is Dead". (Ok you may not want to try this link at work as you may be web-sensed out but it is good and perfect for this occasion--ending with the Lollipop Guild.) Which Witch is Dead? The wicked witch, of course, or in our case the Subprime Witch.
Ok, that was fun, let's get back to the S&P. Really. So, the S&P is the group that gave us Triple A (AAA) ratings on subprime mortgages that are now imploding but let's not dwell on that little fact, let's dwell on what they said Now.
Today S&P declared that the subprime problem will only cost about $285 billion, up slightly from their earlier estimate of $265 billion. The market thought that was great news and was supposedly the reason the market went from the Dow being down well over 200 points to trading nearly 100 points up on the day. That must have been some good news. (We just can't seem to shake this sarcasm.)
There was another piece of news out there from our good Secretary of the Treasury, Paulson, who told us that maybe we should do something about the mortgage problem. We should make tougher standards for realtors, create watch dogs on the mortgage industry in general, and do a few other things that may have prevented the current crisis. Congratulations on that. Here's where we use the phrase, "the horses are already out of the barn" on this one. But, there's more...
The good Sec'y said that the government might like to buy up some of the troubled mortgages, but only if there was a homeowner that was living there. So, now we have the Fed buying mortgage securities and the government thinking about buying mortgages that are underwater. What do you think??? What country are we living in???
Getting back to the market, there is only one thought that matters, what is the market doing? If the market decided to go up on the S&P news or the Paulson news, that isn't the news driving the rally, it's the underlying theme. In this case, there is some ambiguity in the move.
As we mentioned in our last post, the 12,300 level in the Dow is critical to the bullish case. If the Dow can't get to that level, there will be no chance for it to get any higher--are you able to follow this logic (sarcasm, don't take it personally)? The Dow has created this high in the last few weeks so if it can hold it, then we're going down. We thought that maybe the move down this morning was a good start to the down move. But, it wasn't to be.
We have given the market down trend the benefit of the doubt and we continue to do that unless the Dow manages to get over 12,300. Then we may have to adjust.
FSI: 72.34 (a good up move in Speculation)