Online Stock Trading | Ben Bernanke and friends slash the discount rate, extends repurchase agreement terms in order to quell lending concerns

Ben Bernanke and friends slash the discount rate, extends repurchase agreement terms in order to quell lending concerns


Filed Under Market Commentary |

Before the market’s open on Friday the FOMC decided to step in and squash fears in the overnight lending markets.  They slashed the discount rate and extended repurchase agreements out 30 days.  Now, banks with AAA and some privately backed credit are able to go to the Fed and exchange the AAA and privately backed credit for cash.  Now, hedge funds who are overexposed to subprime will have to negotiate with a bank in order to get cash in return of their subprime paper.  Thus, opening counterparty risk to the bank if it decides to come to terms with a hedgefund.  The FOMC for now, thinks it has done its job to help stiffle market fears over lending.  Have they found a cure for the exposure banks and other insitutions have to subprime debt?

What did the markets do with this information?  The morning started off fast and furious, stocks jumped more than 2% on massive volume.  Index options expired at the open, driving some of the volume.  However, the joy came with the FOMC’s announcement.  As the day wore on, traders weren’t able to keep the buying pace.  By the days end, volume ended lower roughly 15% on the NYSE and NASDAQ.  Not what you would like to see in a bull market.  One chart pattern did emerge from the days action in the major indicies.  A massive V-shape move starting Thursday and continuing on Friday. 

V-shape moves off a near-term bottom rarely turn out good for the bulls.  The markets suffered severe oversold conditions where fears were at its peak.  Thursday’s VIX hit up beyond 37 only to reverse hard.  It was quite easy to see that the markets had met a short-term turning point.  Friday’s move confirmed to me that the bulls will be in control for the short-term.  Fast Money as well as Fox’s Bulls and Bears viewers have seen so called “experts” are calling a bottom in the market.  One thing to keep in mind about these trading shows, is that they are there to give trades to people.  Would CNBC or Fox be able to keep a show on with “experts” telling everyone to be in cash? 

Cash is effectively BORING and simply will not sell ad space or subscriptions.  However, at this juncture in the market it is the best thing to do.  Patience and waiting for the right moment to attack is the best course of action.  Trying to nibble at possible gains is simply not worth the hassle. 

However, I do believe the markets will try to make their way back to their 50dmas.  There should be just enough buying interest to get this market a bit higher.  Monday is Day 3 of the attempted market rally.  We’ll need a follow through occuring on the 4th-7th day.  The follow through can certainly occur later than the 7th day as we say on August 15th 2006.  These types of follow-throughs generally do not produce a large amount of winners.  If we do get a follow through we’ll respect that follow through and begin operating back in the market. 

In the meantime, keep cash levels high and emotions out of trading.

Market Speculator

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