Wednesday, July 09, 2008

Capital Concerns at Freddie Crush Financials

The financials had one of their worst days in years after fresh concerns about the capital positions at Fannie and Freddie weighed on the sector. These stocks enjoyed a nice bounce yesterday, but FRE got slammed today, down -25%.

The market held in pretty well up until the final 2 hours of trading, at which point the sellers overwhelmed buyers and the selloff accelerated into the close. Volume looks to have run a tad below yesterday's levels, which while positive is small comfort.

The volatility index (VIX) rose +9% today, which is a big one-day move. The ARMS Index closed at 2.22, an extreme reading. The put/call ratios were elevated as well.

The chart above shows the S&P 500 Index, and the big reversal of yesterday's rally. The four red arrows point to the big upside reversals we had back in March, but how it took several of them before the market finally bottomed.

The blue arrow highlights that amid those big upside reversals, the market did break down to new lows one last time as well. That move proved to be the low for the first half of the year, and the market rallied nicely into mid-May.

I think we are setting up for a similar kind of move. Bearish sentiment is rampant, the market is oversold, and selling pressure looks like it is peaking. If this movie were playing in reverse, we would be talking about a blowoff top, and running to take profits.


At 12:43 AM, Blogger Andrew said...

Perhaps the market is waiting for GE earnings report before the bell on Friday. Even though earnings season is just getting kicked off I've read some decent reports including PBG, HELE, AA, RT, SGR. Many of the estimates across the board have been taken down. Money continues to flow into defensive areas like Pharmaceuticals. The Herd always becomes too defensive when they should be aggressive. WB choice in Robert K. Steel seems like a good one. With short interest rates at all time level highs one would suspect that certain prices are very suspect, should make for some good value hunting. I think you can start pulling the trigger on some quality names now such as PG, KFT, BKS and even select financials like KBE.


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