The Wall Street and the Government Bailout

As of the close of today’s trading, price action and technical indications for all the major indexes show no evidence that a stock market reversal or sustainable rally are emanate. This is very concerning given we are the eve of Congressional passage of the largest financial bailout package in the history of the United States. This implies two things, Wall Street does not believe the measure will pass and/or it does not trust that the proposed legislation will be immediately effective.

If the bailout measure does not pass, one could expect the stock market to react as it did last Monday when it lost 777 points. This however seems unlikely if the media reports can be trusted. Should the bill pass, given its size, it is difficult to imagine that it will not have some positive effect on the financial markets. Already the nation’s three largest banks JPM, BAC and C have gained between75 and 100 percent in the past 2 ½ months. These companies will most likely continue to benefit from the current banking climate.

Should this Federal rescue effort prove effective in “unlocking” the financial markets and thereby relieving the credit crisis, Americans will undoubtedly go back to doing what we do best, borrow and spend. Hence, some of the retailers are starting to show some technical strengthening. While it is still too early to enter a position, JCP and KSS could present a buying opportunity soon.

The saying “Friends don’t let friends buy and hold” is a term that was coined after the NASDAQ gave up more than 78% of its market capitalization when it fell from its all time high reached in March of 2000. The current Market’s weak technical indications along with the economy’s long term fundamental issues make the above statement truer than ever before. Now is not the time to buy and hold securities for the long term. If however, you are willing to assume the risks associated with this tenuous stock market and would like to benefit from the potential effects of the FED’s mass infusion of capital, look for mutual funds that invest in strong financial institutions. The technical indicators for PowerShares Dynamic Banking (symbol PJB), at least for now, are showing considerable strength. Given the current market volatility, I would only enter positions during extreme market weakness.



Bob