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Friday, December 5, 2008

The Bad News Rally

With horrible news and a gap down at the open, followed by a sharp sell off early, what would you expect? Why, of course, a test of support and a subsequent rally, and that is exactly what we got. 818 was the critical level to stay above to keep this rally alive, and that is exactly what we tested today, bouncing off it twice before heading up. We fought our way up to just about break even with a little more than an hour to go, then rallied sharply.

One factor was a reversal in treasury yields. They were negative most of the morning, then reversed just befor the market rallied.

The Nasdaq outperformed the SPX. It did not quite test the previous low, but came pretty close. Volume is higher on up days than on down days.

The Russell 2000 started the day weak, but ended up outperforming the SPX. The trend line has been broken for a second time, and it might hold this time. 473 is the next challenge here, and we aren't that far away.


Financials are leading this rally. they lead the last two rally attempts, both of which failed miserably. The third time might be a charm, but I think it is going to need a lot of help. Stocks bouncing big off 52 week lows is not real leadership.

Late mortgages and foreclosures are now at record levels. With the trends in unemployment that we have been seeing for the last year, I don't understand why Paulson and Bernanke cannot connect the dots here. If your income is zero, what good is refinancing a mortgage going to do you?

I will have an update later tonight.

3 comments:

Anonymous said...

Hey David. Two quick things. I would like to know what the term repricing risk means. Ive heard it used for a while now, in several contexts.
And also Im kicking myself. I bought calls I think Monday or Tuesday on the dIa really really cheap, and was betting on a run to 90. It took me to 84, then stopped me out back at 81, only to go right back up. I know this this sounds dumb, but I knew it, I could feel it,only to chicken out. Danget. Oh well. I guess thats risk management for you.
Eddie B.

Anonymous said...

Hey David. Two quick things. I would like to know what the term repricing risk means. Ive heard it used for a while now, in several contexts.
And also Im kicking myself. I bought calls I think Monday or Tuesday on the dIa really really cheap, and was betting on a run to 90. It took me to 84, then stopped me out back at 81, only to go right back up. I know this this sounds dumb, but I knew it, I could feel it,only to chicken out. Danget. Oh well. I guess thats risk management for you.
Eddie B.

David said...

Hi Eddie,
I have heard the term "repricing risk". I'm not sure, but I believe it is when investors see less risk in an asset, such as stock, they are willing to pay more than when they see the asset as being more risky. Stock prices fall because investors see greater risk that, for instance, growth is slowing, so they are willing to pay less than if they saw growth acclerating. If that doesn't explain it, I'll see if I can find a better definition.

For what it is worth, I think you handled that trade correctly. In this market environment it is vital to control risk and not let losses get out of control. Today's rally came out of the blue, so there really wasn't any way you could have anticipated it.

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