“The bear market’s over!”
“We’ve just seen the bottom.”
“The VIX has retreated; therefore, we’ve hit the bottom.”
This is what I’ve seen or heard since Thursday. So have we seen the bottom, waved, and moved on on merry way?
Last week was definitely an interesting week. Bear Stearns (BSC) was purchased for $2 per share (yes, $2 and not $20 as most figured $2 was a typo). The Fed cut the discount rate not once, but twice last week. Sunday evening, the Fed cut the discount window by a quarter point. What was more important was the opening of the discount window not only to banks as usual but to investment banks as well such as Lehman (LEH) and Goldman (GS). Could this move have saved BSC? I don’t think we’ll have the chance to see that but one never knows seeing as how the sale may take longer than expected due to litigation, BSC employees and BSC stockholders.
Liquidity issues? Doesn’t seem to be an issue anymore. Credit crisis issue solved?
Not to be outdone, the Fed on Tuesday cut the discount rate by another half point to 2.5% as well as the funds rate by three-quarter points to 2.25%. After putting in a strong hammer candle on Monday, the combination of the technicals from the hammer plus the rate cut helped boost the markets Tuesday.
Wednesday’s drop could be perceived as profit taking as well as full digestion of the previous day’s rate cut. The bears also have a strong foothold on the 1330 S&P level so some resistance was expected.
Thursday was expiry day with a number of derivatives expiring including March options. Was Thursday a solid rally day or more of a short covering into a holiday weekend? I will point out if you look at Thursday’s candle, it’s very close to a bullish engulfment. Normally, a bullish (or bearish) engulfment will “engulf” the previous day’s candle. In Thursday’s case, the bullish candle closes just slightly lower than Wednesday’s open. If you notice, the top tail of Thursday’s candle does reach Wednesday’s open but backs off slightly indicating continuing strong resistance at S&P 1330.
So what does this mean for Monday? I foresee a battle between the bulls and bears at that 1330 level. If the bulls can push it past Wednesday’s high, in the short term expect the markets to move higher. The next logical level appears to be near the 1390-1400 area. It all hinges on the financials. If they can keep up their current bullish sentiment, expect S&P 1400 to be here much sooner than you think.