A Major Market Bottom or a Dead Cat Bounce

A Major Market Bottom or a Dead Cat Bounce

The stock market’s price action of the last two days has been astounding to say the lease. On Thursday the DOW rallied 410 points after the FED announced that it would “lend” AIG (the nation’s largest insurer) $85 billion in exchange for a 79.9% stake and government oversight. In addition the FED and most major Central Banks of the world, in aggregate, have pumped hundreds of billions of dollars into their respective economies.

Today (Friday) the FED banned “short selling”, (for a definition of short selling go to http://en.wikipedia.org/wiki/Short_selling) of certain financial stocks, the number of restricted equities exceeded 700. This FED action required brokers to cancel thousands of sell orders without the permission or knowledge of the account holders. The result was an imbalance in orders when the market opened Friday morning. In other words there were far more buy orders then sell orders on the trading floor at Friday’s opening bell. The buying frenzy, albeit artificially created, was exaggerated when short traders were force to enter more buy orders to cover their existing short positions as the market rallied. The FED’s action over the past two trading days arrested what could have turned into a true” market meltdown” and cause a combined 700+ point rally on Thursday and Friday.

Treasury Secretary Paulson, aka the Bush administration, has proposed a $700 Billion bailout package which would be used to buy bad mortgage investments from financial institutions. Combine this with the AIG, Fannie Mae, Freddie Mac and LEH bailouts and the number approaches $1 Trillion or $3300 for every man, women and child in the United States.

The key phrase in the above paragraph is “the Bush administration”. The Democratic controlled Congress will most likely attempt to use this event to their advantage in their bid for the White House. What effect will this action have on an already skittish Wall Street?

While the technical indicators and price action continue show weakness, one cannot rule out another Government intervention. If the “Plan” turns into a political football, which I believe will happen; the market could continue its move lower. If however the FED interprets a continued market selloff as a large enough threat, they may continue to take “unprecedented action” to stop its fall.

The bottom line is quite simple this. Free market theory is no longer in control of the US financial markets. Its price action is now at the whims of the Bush administration and therefore anything can happen. The Administration has demonstrated that it will do whatever they feel is necessary to prevent a “meltdown” of the financial markets. The question remains whether the action taken will be effective.

I personally am taking no action until clarity returns to the market.

Bob