Gov't Intervention Gives Hope

Monday, July 14, 2008

The government stepped in this weekend saving the markets from panic and stemming the fear that we need to capitulate this market. While it would be devastating to the U.S. economy if Fannie Mae or Freddie Mac were to fail, the Fed intervention is the worst step for the stock market. The market remains hopeful. "As long as the hope is alive, the bear market is very much intact."

The shorts still have conviction and the buyers remain ready to take profits on every rally attempt. We need the capitulation to force buyers to panic out and shorts to be baited and squeezed. This type of bottoming action wipes out the weak stock holders and scares the shorts. I view the government's intervention as the worst possible step for the health of the stock market in the short-term. The Federal Reserve cannot really concern itself with reaction of the stock market and probably made the right move for long-term U.S. economic health and housing market stability. But, I think we have some time before we climb out of this bear market and start a new uptrend.

On the other hand, financials seem to be nearing capitulation. IndyMac's bankruptcy is the second-largest bank in U.S. history to fail. Shares of other regional banks were hammered across the board today. We can probably expect more small banks to collapse under the weight of billions in non-performing assets. We need participation from the financials in order to turn this market around. It seems the bankruptcy of another large institution might be needed. Lehman Brothers continues to be on the rumor mill and is a possible target for the bears.

The bottom is yet to be found!


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