by Sam Collins 10/08/08
The U.S. markets opened higher Tuesday, despite selling in Europe, when the Fed said that it would start buying commercial paper.
In an attempt to plug the declines, the Fed said that it will bypass ailing banks and lend directly to U.S. corporations. Major industrial nations announced rates cuts of .5% to 1.50%; the Fed voted last night 10-to-0 to cut the discount rate by .5% to a level of 1.75% and the Fed funds target rate was cut .5% to 1.50%.
Yesterday, a sell-off in the shares of Dow (DJI) stock Bank of America (BAC) occurred after BAC announced a 68% profit fall, cutting its dividend, and revising its outlook for the economy. It also said that it would raise up to $10 billion in a common stock offering.
But the market then ran into trouble when Fed chairman Ben Bernanke met with the National Association of Business Economists. During that meeting he said that economic activity is likely to be subdued through this year and into 2009 and that at the next FOMC meeting it was possible that the Fed would again cut interest rates. Many had thought that he would announce a rate cut in concert with other central banks yesterday.
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Also in the financial sector, Morgan Stanley (MS) fell almost 25% on speculation that its arrangement for $9 billion from Mitsubishi UFJ Financial might be coming unglued.
At the close, the Dow (DJI) was down 508 points to 9,447, the S&P 500 (SPX) lost 61 points to 996 and the Nasdaq (NASD) fell 108 points, closing at 1,755.
The NYSE traded just over 1.7 billion shares, with a ratio of nine decliners for every advancer. On the Nasdaq, volume totaled almost 1.3 billion shares and there decliners were ahead by 5-to-1.
Crude oil (November contract) gained $2.25, closing at $90.06 a barrel, and the Amex Energy SPDR (XLE) fell $3.01 to $51.88.
The December gold contract rose $15.80 to $882 per troy ounce, and the PHLX Gold/Silver Index (XAU) fell $1.60, closing at a new low of $103.63. But the metal must get through the $900-$925 congestion if it is to challenge the highs of July which hit $1,000 an ounce. Support is at $822.
What the Markets Are Saying
The freefall in common stocks continued Tuesday with the disappointment over no rate cut by the Fed. This sort of irrational response to a lack of news is characteristic of capitulations in this phase of bear-market selling.
Volume was, again, relatively high, but the breadth of the selling was broad with seven stocks down for every stock up and volume on the downside was an astounding 23.5-to-1.
But even with all of that downside momentum, the major indices just barely broke to new lows while our internal indicators almost ran off of the chart into deep oversold territory. The S&P 500 (SPX) took another step toward the old bull market breakout of May 2003 at 950 to 960, while one important internal indicator, the Moving Average Convergence/Divergence (MACD), ran to new lows and is now very close to the triple-bottom reversal area that marked the bottom of the 2002 bear market.
Conclusion: As one trader this morning put it, "Fear, not fundamentals, is driving the market." Expect a sharp upside rally very soon (perhaps due to a news event like a global cut in interest rates) and use it to lighten up again on holdings that you don't intend to own long term.
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Earnings to be reported include: Acergy S.A. (ACGY), Costco Wholesale Corp. (COST), Helen of Troy Ltd (HELE), Kayne Anderson Energy Development Co (KED), Lindsay Corp LNN), Monsanto Co (MON), Nu Horizons Electronic (NU), Richardson Electronics (RELL) and Ruby Tuesday (RT).
In terms of economic report due, we can expect August Pending Home Sales (the consensus expects negative 1.4%).
Asian markets were hit hard overnight with Japan's Nikkei Average off 9.38%. Britain unveiled a broad bailout which calls for the government to buy into banks including the Royal Bank of Scotland (RBS) and Barclays (BCS).
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FAST is now consolidating and recently flashed a buy signal from our internal indicator.
Options Expiration Adds Volatility
The opening looks to be higher but today is options expiration day, and anything could happen.
Chances are high stocks will sell off further, but be alert for a dead-cat bounce after such a dramatic breakdown.
Traders and longer-term investors should sell any new positions at the first opportunity and short ETFs on a temporary recovery in the market.
CAT, the blue-chip of its industry, is the first to attract attention when it's time to dress up a portfolio.
