Will The Bounce Hold?

The market is getting a nice bounce in the first hour of trading, with the S&P 500 up as much as +3.0%. The bank index is leading the way, after yesterday's drubbing, rallying +11.22%. Homebuilders and biotechs are lagging.

The selloff yesterday afternoon was sparked by the House rejecting the financial relief plan. They saw the stock market's response yesterday, and today they should look at the Libor market, which is the rates banks charge each other for short-term loans.

Libor has surged as much as 430 basis points this morning, to a high level of 6.88%, indicating that banks are highly reluctant to lend to each other. This tightening of the credit market impacts the entire global community, and is one of the reasons why even the Prime Minister of Australia was pleading with Congress to get this bill passed. Congress is expected to work on a new plan, with a vote coming as soon as Thursday.

Fed funds futures are now suggesting an 80% chance of a 50 basis point cut when the FOMC meets on 10/29, compared to no chance as of last week. This would be another response to the tightening credit markets.

The CashShiller index showed home prices in 20 major metro areas fell -16.3% yr/yr in July. This index peaked in July 2006, and is now some -20% below those levels.

Asian markets were mostly lower overnight, but China and Hong Kong shook off their losses to close in positive territory. This is one sign that the selling may have exhausted itself for now.

The dollar is surging this morning, pushing gold lower. But oil is higher, trading near $99.25. The 10-year yield is also higher after yesterday's flight to safety, up 8 bps to 3.71%.

The volatility index (VIX) is down -13.27% right now to 40.52. This is a good sign, but it still has a ways to go to signal normal levels of investor anxiety. I would like to see it get back below 30, but this could take a little while.

There has been no attempt to sell this early rally in the first hour. Let's hope that is a positive sign for the rest of the session.

long SDS