FNM & FRE = Brutal

Monday, July 14, 2008

FNM was trading up as much as 42% pre-market opening up 7% while FRE was trading up as much as 44% pre-market opening up 16%. Today, both stocks were classic examples of a "buy the rumor, sell the news" trade. Both stocks rallied late Friday on news of a Federal Reserve rescue plan that included an opening of the discount window to these two companies. While these stocks sold off after the Federal Reserve neither confirmed nor denied the rumors, they still held on to much of their intraday gains.

The Federal Reserve released its plan late Sunday night including a line of credit, opening of the discount window and a possible equity stake if needed. This plan provided a pre-market lift to Fannie and Freddie shares. But, as many Wall Streeters already knew this news from Friday's rumors, they took the gap-up as an opportunity to take profits and ditch losing positions at the best possible prices.

Both stocks ended the day negative after trading up huge pre-market. This is very bearish for the short-term outlook of these stocks as the news was not sufficient enough to provide a sustainable boost to the shares. Friday was not capitulation and Fannie and Freddie are likely to be met by selling at every technical level on every rally attempt. Another move down would not be surprising but I expect the stocks to range between their most recent breakdown levels and the year's lows in the near term.


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