Monday, September 22, 2008

market trend: a whole new horizon?

Just as i posted my view on US Treasury call for a balance sheet cleanup, the US authorities jointly came out with a rescue plan to save Wall Street:
The buyout plan—with few firm details—is announced. President Bush says the move puts "a significant amount of taxpayer dollars on the line," but he says the risk of not acting "would be far higher." In additional actions, the Treasury and Fed act to guarantee the assets of money-market funds, which had been threatened by the meltdown of the financial markets, and the SEC places a temporary ban on the short-selling of nearly 799 financial stocks.
Indeed, some very drastic moves by by the authorities which could very well change the face of the US financial system forever. A step away from what they had preached for decades - a financial deregulation. It is like imposing a capital control only stopping short of currency peg and a regulated flow of dollars.
The ban on short selling prompted a short covering spree by shorties resulting in a 368 points rise in Dow.
So what will happen now? What will happen to Dow after all the short covering is done? Is the further injection of USD 700B enough to turn everything around?
All these drastic moves can be translated as a serious failure in US financial system. A USD 700B is just an insignificant figure given the seriousness of the subprime mortgages which have clearly wiped out tens of trillion in terms of market capitalization worldwide. Not mentioning the damages from the the wild swings in derivatives markets.
However, these moves can also be seen as the beginning of a consolidation stage where everything will more or less stabilize from now. Don't dream for an instant recovery. Rule of thumb applies. No instant recovery when damage is of such magnitude. The recovery factor rest on the real economy from now. All these takes time. Real economy remains gloomy. It may takes at least 5 years before US could find it's footing again. Again, these measures only tell the weakness of US and it does not change the poor fundamentals of US economy and financial system. Dow would remain downside biase after the initial uproar over these measures.
Temporary ban on short selling. A drastic and draconian move subjected to open abuses. Congress should call for an investigation into substantial long trades taken days before these moves were announced. If they can do it for 911, they need to do the same for this situation especially so, for those 4 powerful guys pictured above. Nevertheless, this very move by the SEC has incurred the wrath of all hedge funds. Once that happened, be prepared for a longer consolidation period as hedge funds would move away to markets with greener pastures.
These moves has indeed created a whole new horizon for other parts of the world as the exodus of funds will begin sooner. Whether it will reach our shore remains very much on the ability of our administration to reform the rotting system.
With the recent development, it would be advisable to stay on the sideline. For the index futures traders, it is almost impossible to trade with contracts crossover activities about to start soon. When this activities happen, the futures trend would move independently without regard to the cash market. It's a transferring activity from the left hand to right hand and looking for suckers to kill at the same time.
Stay neutral for the next few days with eyes on volume and index. Very good indicators with this battered market condition.

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