April Fool Rally?

Is it a little ironic that the S&P 500 Index has a 3.5% rally on April Fool's Day? It has been tough market the last few months, but the first day of the second quarter has gotten off to a great start. This doesn't mean that all of yesterday's problems are gone, but it does mean that for now some of the risk might be priced into the market. This could change quickly when new storm clouds arise, or when some of the old storm clouds come back bigger and stronger.

Below are two charts of the S&P 500 Index. One chart shows the S&P 500 with it's extensions based on the opening range. This chart also shows the updated pivot numbers to watch as strength of this rally day is measured in days to come. The second chart shows the S&P 500 with an indicator showing the percentage of stocks trading above their 40 period moving averages. This is a key chart to watch because it shows that the recent low in prices was not confirmed by a new low in stocks trading below their 40 period moving averages. This divergence is marked with red lines.

S&P 500 Index- Opening Range Extensions (click to enlarge)

S&P 500 Index - % Stocks Above 40 Period Moving Average(click to enlarge)
A similar chart to the percentage of stocks trading above their 40 period moving average chart is one depicting the advance decline moving average chart. This shows a similar divergence, but also shows that the market might be a little ahead of itself with this one day massive rally.

S&P 500 Index Adv-Dec (click to enlarge)

The U.S. Dollar Index chart is important to watch as this large rally day is digested. This index is forming a triangle pattern. The dollar has stalled in it's downward move. This could be because of some anticipated actions by the European Union to coincide with the actions the U.S.Federal Reserve took in previous weeks. If Europe decides to add liquidity and or cut interest rates, there could be some profit taking by investors who have been long the Euro.

U.S. Dollar Index(click to enlarge)

EUR/USD Daily Chart

Last Day Of The First Quarter

Looking back there has been a year's worth of news in 2008 and it is only the end of the first quarter. The volatility has been greater this year than last, to say the least. The chances of things calming down seem quit slim.

Below is a chart of the S&P 500 Index. This basic chart shows the extension levels based on the opening range. The market rallied into the 1350 area and has since failed to hold those gains and is closer now to the 1290 area.

S&P 500 Index(click to enlarge)

One method to measure the strength of any move is to compare the daily pivot,(H+L+C)/3, to the three day rolling pivot, (3day Highest High + 3day Lowest Low + Close)/3. The daily pivot from Friday is 1321.01 and the 3day Pivot is 1326.87. As the daily pivot is below the 3day pivot, the path of least resistance is down. For any rally to change this momentum, prices must cross the 1321.01 and 1326.87. Most years this could take a day or two to set up, but this year it can take 15minutes.

The middle pane in the chart below shows the daily pivot and the 3day pivot.

Did The Fed Come To The Aid Of Bear Stearns Or J.P.Morgan?

Usually when one company decides to merge or takeover another company it is because there is some synergies and economic benefit to the two companies combining resources. A few months back Bank Of America decided that Countrywide Financial was a good value at around $17 a share when they did a 2 billion dollar convertible deal. The stock now trades at $5.87. In the spirit of throwing good money after bad, Bank of America decides to take over Countrywide as it traded significantly lower that the convertible deal. The conclusions that can be drawn are either Bank of America didn't do its due diligence in investigating the problems with Countrywide Financial, they underestimated to credit environment in the United States, or there were other considerations in taking over the company.

One thought that comes to mind, is that Bank of America was most likely tied to lending money to Countrywide and was holding a significant amount of paper that it was going to take a long time to recoup its value. So one attempt to help the situation was the convertible deal at $17. When that didn't solve Countrywide's problems, the problems were now Bank of America's problems. So as the price continued to drop, Bank of America finally stepped in and bought the company. This purchase was probably a-have-to type take over.

Countrywide Financial - CFC (click t0 enlarge)

Bank of America - BAC

Now that JPMorgan has made an offer for Bear Stearns, why should be a question that people are asking. Is it because it was a good deal for JPMorgan or was it because they were financially tied to Bear Stears in all kinds of CDOs and other financial assets that have become totally illiquid? Was this a deal entered willingly or was this done out of necessity? While the Federal Reserve did back all the paper that JPM is taking on from the Bear Stearns deal, the question still exists why did JPM decide on this deal?

Paying $240 million for this company seems like a very low number. The headquarters building of Bear Stearns is estimated to be worth over $1billion. Likely this week there will be talk of JPM increasing the offer for Bear Stearns, this is most likely to quell talk that this deal was not good for shareholders. The $2 offer was a token offer to shareholders. Was the company worth less? If it wasn't for the Fed stepping in it would be trading at zero, and all the paper held buy the company would have traded at ridiculously low values, but it would have helped to cleanse the system. With the JPM deal, the waters are just muddier. There will be more events to come, and this deal will be seen for all it really is.

JPMorgan Chase and Co.- JPM

Bear Stearns Companies - BSC

Cramer's Take On Bear Stearns


The chart below is the S&P 500 Index. As prices approach the 1350 area, it is a good place to take profits on any long positions and leg into short positions.

S&P 500 Index (click to enlarge)

Six Minutes Worth Listening To

Jim Rogers on CNBC and Bloomberg.

Dow Jones Industrial Average Up 400 Points. Steroids?

Ben Bernanke's deal with the devil might be working for the short term, but two problems still loom on the horizon. The ever present problem of inflation still exists, but it is a secondary concern currently with the problems in the credit and banking markets. The second problem is what ammunition works best to solve the problems in the banking sector. As much as it seems helpful to always being doing something to promote lending and more liquidity, the only cure for what ails the system right now is time. As long as housing prices are going down, it is very hard for prices for stabilize. All of the prices of mortgage backed securities can not be truly valued until housing prices stop their decline. This is not something that is going to happen in a week or two because the Fed has cut rates. All the rate cuts do it hopefully create more room for banks to lend and create liquidity. This can only happen when fear is not the governing emotion in the lending market. It will take time. Time for fear to be replaced by the desire to grow, and time for prices in the housing market to stabilize.

How many more bullets does the Fed have in its gun to fight more potential problems? The Fed has committed as much as 60 percent of the $709 billion in Treasury securities on its balance sheet to providing liquidity and opened the door to more with its recent decision to become a lender of last resort for the biggest Wall Street dealers. This is essentially the same as the idea a few months back when there was talk of some of the largest banks getting together and creating an off balance sheet fund to deal with these mortgage securities. This plan was scrapped, but now the Fed has stepped in to do the same thing. They have time on their side, and many of these securities will perform the way they were intended. It does however make one think to what point does the Fed willingness to take on these debts stop?

Ben's deal with the devil to reduce rates so low to help unfreeze the credit markets can work in the short term, but inflation is still a force to contend with. Calculating inflation figures minus food and energy is like saying a team would be 30-2 if it wasn't for them getting blown out in the fourth quarter of every game. The demographics of our economy that are living on fixed income and interest payments is very large. This group of retired people take a strong hit in income when the Fed decides to reduce rates to effectively zero to compensate for the actions of irresponsible borrowers and aggressive lenders. Finding investments paying 5% six months ago was not a problem, but today that rate is roughly half of that amount. With food and energy rising in price, it would make sense for rates to go higher to compensate savers for the increase in prices, and possibly in return keeping prices, inflation, down.

Below is a chart of the Dow 30. This is a day chart showing a series of standard deviation lines from a long term linear regression line. The yellow circle shows the last attempt to get to the channel and the kiss goodbye. The market is trying to make a short term bottom. We have had a couple very strong up days in the last month, but they have not had much follow through with strong volume. It is going to take time, and an strong rally back to the 12700 area should be sold into.

Dow Jones Industrials (click to enlarge)

This is a longer term chart of the Dow 30. It is a 3day bar chart which is used to smooth out daily fluctuations.

Dow Jones Industrial Average(click to enlarge)

This is the S&P 500 Index with extensions from the opening range. The 1350.61 area is the next target.

S&P 500 Index(click to enlarge)