It appears many in Tinseltown believe today's thumping was just a speed bump on the road higher. Already, the same tired faces are claiming bottom is in. Today's slow, relentless bleed, they say, simply was but a remnant of difficulties already digested ... an echo of problems well on the way to being solved.
This, however, is not likely.
The future, you see, is being paved with a blank check the Congress has just written Treasury. And I contend this could facilitate what might be an historic consolidation of the financial industry over the months ahead.
Let's review the facts...
First came the take down of Bear Stearns and the wakeup call this imposed on Washington D.C. (in an election year no less). Call this incident a template for asset grabs on a fast track.
Then, more recently, we had a (manufactured?) shakedown of GSE debt and equity during the present, advanced stage of a still ongoing credit crisis precipitated by leverage gone wild on a revenue stream (i.e. mortgages) whose foundation was (purposely?) made weak under the guise of benevolence. (Paraphrasing a scene in the movie "Blazing Saddles," one might imagine many a former mortgage broker saying, "Income? We don't need no stinking income!")
Now, do you really think it is merely a coincidence the outbreak of crisis at the core of securities-based finance (i.e. the GSEs) occurred precisely at a time when the Congress was wrapping up the legislative process to The American Housing Rescue and Foreclosure Prevention Act?
The skeptic understands all things are not what they seem. So, under what appeared to be emergency conditions, Treasury Secretary Paulson asked Congress on July 13 to give the Treasury power to provide a liquidity and capital "backstop" for Fannie Mae and Freddie Mac.
Whala! The Congress has delivered the blank check Goldman Sachs ... er, I mean Treasury ... wanted.
Of course, the Congressional Budget Office, doing its best Alan Schwartz imitation, has assured the American public there probably is a better than 50% chance Treasury will not need to step in. Indeed, CBO says there is only a 5% chance Freddie and Fannie's losses cost the government $100 billion.
Again enters the skeptic ... recalling early cost projections of the war in Iraq ... suspecting there is a 100% chance that Freddie and Fannie's losses could cost the government ten times the CBO estimate ... easily.
Not that 20% of the combined $5+ trillion GSE portfolio is presently at risk.
However, once the pending financial industry consolidation accelerates a la BSC ... with the GSEs now having a blank check backstop at Treasury ... allowing them to absorb much of the toxic waste presently on the books of take down targets among the Cox 19 and beyond ... thus, taking the past many years' GSE portfolio expansion to a new level ... then might CBO assurances prove as devoid of credibility as an intelligence assessment coming from the mouth of Dick Cheney?
By no means has the stock market experienced capitulation in its yearlong consolidation. Maybe the grand finale has been patiently awaiting its subsequent melt-up fuel. Soon enough we will know with certainty...
A globe awash in Treasury and GSE securities points to another trend that's your friend...
(And this one leads to Dow 3600.)
[5:00 p.m.]
Up until today I have been assuming the S&P 100's initial decline from its May 19, 2008 peak was being corrected with a simple Elliott wave form whose end was nigh. Indeed, it appears this anticipated counter-trend rally reached its zenith yesterday morning.
Now, however, it appears trading over coming days could extend the S&P 100's present [pre-capitulation] correction. Price action since yesterday's peak raises this possibility. Nevertheless, once this correction finally completes a sharp move lower might then more likely unfold.
Simply put, nothing about the big picture has changed, despite a slight alteration to my present outlook. Let me explain...
As I am sure you are aware, indexes never move in a straight line. Sometimes there are periods when sideways trading develops. Here, an index moves both counter to the main trend, as well as with it, too ... and remains more or less range bound. The present correction of the S&P 100's decline from 5.19.08 might turn out to be one such instance.
Best guess right now has the S&P 100 continuing its ongoing correction somewhere within the range established over the past couple weeks. As I indicated at the start, it appears the upper end of this range was set yesterday. Thus, presently, the S&P 100 appears in the process of trading back down to the area of 55o (give or take).
Of course, this forecast move lower probably will not unfold in a straight line. There likely will be brief periods when the S&P 100 trades sideways-to-higher in the course of completing its presently unfolding decline to the lower end of its recent trading range.
Finally, bear in mind there is nothing set in stone about the perspective I am presenting here. Much as I indicated in remarks made earlier today, it simply appears the market's fade from yesterday's peak is demonstrating such characteristics as heighten the possibility I am raising.
Without going into details here, this present refinement in my view toward the S&P 100's still ongoing correction of its decline from May 19, 2008 seems rather fitting with the general character of things over the entire duration ... signaling both further selling dragging the index inexorably lower and the pending completion of the market's nearly yearlong consolidation of gains made since October 2002.
Weakness demonstrated by RSI following yesterday morning's peak was only further revealed today from start to finish. This suggests more weakness still to come on Friday. The projection of a drop to the 570 area is more or less a reasonable guess at this point.
[11:00 a.m.]
Everything about the S&P 100's turn away from yesterday's a.m. peak has the look of a corrective wave unfolding part and parcel with the index's advance since Tuesday, July 15, 2008, rather than an impulse wave beginning its much anticipated capitulation.
This morning's decline produced RSI degradation suggesting the S&P 100's advance from its Tuesday morning low (7.22.08) is reaching exhaustion (much as should be expected here). Expect one final advance lifting the S&P 100 slightly above yesterday's peak, with RSI diverging from the extreme buy-side strength it coincidentally registered then.
Curiously, the NYSE Composite has broken below its rising trend line since bottoming on Tuesday, July 15, 2008. However, this does not negate the possibility that, it too is slated to make one final advance to a level slightly higher than yesterday's peak. Like the S&P 100, the NYSE Composite's decline since yesterday morning is not unfolding in such a way as suggests the beginning of its anticipated capitulation.
Of course, I could be wrong. My analysis here might be faulty. Nevertheless, I am satisfied to bail out of my August OEX 570 Put position, breaking even and anticipating a better entry point ahead.
I still have five August OEX 520 Put positions open, too. I am not yet sure what to do with these. For the time being I will hold, just in case my analysis here proves wrong.
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