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September 30, 2008

Down 777, Up 485: Another Special Market Comment

Nice rally today. It didn’t get much commentary in the financial press but all day I was telling contacts that the infrastructure of Wall Street benefited from a big up day because it was quarter end. While I am not a conspiracy theorist I suspect that played a role in the rally.

Another thing I believe played a role that received little comments was sharp drop in the Dow and S&P averages after the close on Monday. I posted about this on RealMoney.com stating "My one minute chart on the S&P shows a 4 PM price of 1124. I then show steady deterioration to the posted close of 1106.42 which occurred at 4:23 PM. The Dow chart show something similar with a decline of around 150 points after the 4PM close."

S&P Futures never traded near the cash close, holding at 1115 to 1120 vs. the printed NY close of 1106. When the futures reopened at 4:30 and did not sink it was clear that all else equal overnight a rally was in store to recoup 1-2% on the open.

I've been telling clients since September 17th and18th when Morgan Stanley and Goldman melted down that I thought we were in the process of bottoming. Yesterday's rally helps the cause but we need to stop with the huge daily moves. I don't think down 800, up 500 builds much confidence in the market.

I am in favor of the bailout plan as I see it as emergency surgery to save the patient before a new program of long-term treatment can be implemented. I would have preferred to see the House pass it on Monday. However, the timing of the vote, just prior to a holiday, might have proved helpful. We got a day where things calmed down a bit. There was less emotion and we had a chance for some other parts of the rescue program to develop, most importantly, the possible changes in mark-to-market accounting. We had less panicked talk (some have accused me of inciting it) and the markets got to function a bit (the relatively good performance in Asia and especially Europe overnight Monday helped greatly).

I remain of the view that the resiliency seen in the economy since the credit crisis really started in the summer of 2007 will re-emerge as it recedes. I am not saying the economy won’t slow further or decline just that it won’t slow or decline as much as conventional wisdom believes.

I think stocks are bottoming because Wall Street can deal with economic issues now that it is accepting the magnitude of credit crisis and taking big enough steps to wall it off. Wall Street has not been able to deal with and efficiently price the credit crisis. I believe Wall Street can deal with the efficiently price a weak economy. To me, that is a game changer and balances the risk-reward tradeoff for stocks.

Posted by Steve Birenberg at September 30, 2008 04:42 PM in Market