Thursday, September 18, 2008

A Day of Relief

In some respects, today was a historic day. I could write a lot of words about how the day unfolded, but I think you will get a better sense of today's roller coaster session if I use a lot of charts. So I have included the graphs below to illustrate my points for today. (You can click on any graph to enlarge it and view it in full size)

The first chart is of the Bank Index (BKX) that investors follow. This morning, the financials were under pressure again. The shorts were gunning for Goldman (GS) and Morgan (MS), as well as driving stocks like Citi (C) to new lows.

Around midday came the news that the FSA (in Great Britain) was banning all short-selling of financial stocks in the UK until January. This is a crazy idea, but we are in crazy times. This sparked an initial short-covering rally in the financials, and the bank index rallied fully +25% from its lows. For the day, the BKX gained +13.8%. Also, and this is important, notice that the bank index remains fully 50% higher than its July lows, despite the barrage of negative headlines.

The next chart below is for the S&P Homebuilder ETF (XHB), which tracks housing stocks. This fund also bottomed midday, along with the financials, and began to rally. But late in the day it picked up an extra head of steam when the news came out that Treasury Secretary Paulson was having high level meetings to discuss forming some sort of Resolution Trust Corp., like the one created to help get out of the S&L crisis in 1989.

That news gave a boost to the overall market, and especially any real estate related stocks. The XHB rallied +21% from its intraday lows, and closed +11% on the day. This index is also well above its July lows, as the market finally seems to think that a bottom in the housing market is within sight.

The next chart is for the S&P 500 (SPX), which reflects how the overall market fared. The SPX made a new yearly low this morning, but also bottomed with the FSA news and rallied more on the RTC rumors.

The SPX rallied +6.8% from its intraday lows, and closed up +4.3% on the day, on a big rise in volume. Today's rally didn't completely erase yesterday's plunge, but we did close above Monday's closing levels (1192). From here follow-through will be key.

The next chart is of the volatility index (VIX), or what is called the "fear" index. The VIX often spikes when investors become fearful and panic selling hits the market. This was quite evident this week, and this morning, the VIX hits its highest level (42) since October 2002, the nadir of the last bear market.

Spikes of this nature have always marked a bottom in the market, at least within a short-period of time. It remains to be seen if this indicator will work again this time around, but today's action bodes well. Not only did the VIX spike to 42 intraday, but then it reversed lower into the close and declined a full -21% from its high.

The last chart I want to show is of Morgan Stanley (MS). This morning, MS was falling by a huge amount, just like its investment banking bretheren lately. But when the market bottomed, MS came roaring back. From its early lows near $12, the stock spiked up +100% and hit $24 with a half hour to go in today's session. I hope some shorts got badly burned on this one.

I am going to save my comments on the idea of banning short selling on stocks. I am a "free market" guy, but given what has transpired in the market, I'll let the regulators try anything briefly if it will help instill confidence back into the markets. We can talk about the moral hazards on the ethics blogs.

Tomorrow should be interesting, especially since it is the end of the week, and also an options expiraton day. I sold a little bit more of one of my hedges today (TWM), though I still own some of both. I need to see more than one day of stabilization before putting cash to work, even as I see lots of bargains that have been created by the indiscriminate selling.

I'm going for some good sushi tonight to try to recharge the batteries. Have a good night--


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