Stocks Show Notable Resilience

Wednesday, March 25, 2009

Fundamental Take:
The market reversed today after falling into negative territory closing with a 89-point gain. Timothy Geithner put the US dollar and gold on a wild ride this morning after his comments were misstated on major newswires. An original release misstated that Geithner was "quite open" to a global currency causing the dollar to plunge and gold to explode. Later released were comments that he sees no change to the dollar as the world's reserve currency and expects it to be the dominant currency for the foreseable future causing the dollar and gold to snapback to previous levels.

Moody's started the afternoon sell-off releasing a note around 1 o'clock lowering ratings on Wells Fargo's debt and preferred shares. Moody's believes capital ratios at the company may soon become strained requiring additional support from the government. A hour later Moody's released another report downgrading the debt and preferred of Bank of America. Moody's sees Bank of America possibly needing a third capital injection from the US government.

Technical Take:

Today's action showed notable resilience in the market. After gapping up and trading higher the market was up over 200 points late in the morning. The market based on highs for several hours but was hit with heavy selling over lunch and into the afternoon. Stocks slid over 300 points where they then turned on a dime at 3 o'clock and mounted a strong rally. The rally was unexpected and impressive to traders with the Dow rallying 200 points in the final hour of trade. Goldman Sachs continues to lead the market higher gaining 2.4% today now 138% off its lows for this bear market. Until Goldman can be cracked this rally is in tact in the short-term. This rally puts the S&P 500 over 20% off the lows of 12 trading days ago. The lack of a pull-in is forcing investors to chase stocks higher only exacerbating the move. The recent fall and rebound has offered no opportunity for real money to get involved in the market again.

The recent action is best summarized by Craig Hodges, portfolio manager for Hodges Capital Management, "Everyone is saying that we're going to go back and test the lows, but you know, the market doesn't usually reward the consensus view." This market has significantly changed. Multiple days with strong upside reversals are highly indicative of a bottom. The strength of the bid coming into financial shares appears to suggest that a bottom is in. If the financial sector can simply stop falling and begin basing at these lower levels the market will be able to stabalize and mount a sustainable rally. A rotation into energy and technology shares could provide the needed boost to the market for a longer-term rally as financials fall out of play and begin the basing for months.


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