Monday, September 10, 2007

Market a fickle friend

Monday's market movements were more of the same, with a zig-zag pattern ending slightly on the up side for most of the indices. In particular, the Dow was up on the open, traded 80 points lower just before noon, slowly moved to the highs of the day after 3:00 and faded badly into the close.

One trader was heard to say, "this is like my wife. I never know when her mood will change." And so it is in this most fickle, direction-less market in recent memory. After being hammered lower mid-August, it's been sideways ever since.

Much of today's gain was likely the cause of covert manipulation, short covering or butt-saving, since, with volume so dismally low, the only people trading are Wall Street hot shots and hedge fund managers.
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Sooner or later they will run out of witless fools to buy stocks and the markets will dry up completely, much like those serving corporate credit. In some ways, the stock market has already becoming illiquid, especially for low-priced, low volume stocks.

The S&P came dangerously close to support, hitting a low of 1439, and that's precisely when the trade reversed course. The big money doesn't want a meltdown, even though world markets are dangerously close, and buyers stepped in today to avoid collapse. Major European markets all closed lower, with the credit squeeze becoming front page news in Great Britain as the Bank of England on Friday was forced to make statements similar to our own Fed's, that they would continue to supply liquidity.

Dow 13,127.85 +14.47; NASDAQ 2,559.11 -6.59; S&P 500 1,451.70 -1.85; NYSE Composite 9,457.64 -28.80

Market internals indicated more weakness as declining issues outpaced advancers by better than a 3-2 margin and new lows superseded new highs, 257-92.

Oil priced higher by 78 cents, to $77.49; gold continued its rally, up $2.50 to $712.20, though silver lost 6 cents to finish at $12.70.

The most significant piece of trading information probably came from watching Countrywide Financial (CFC) drop nearly another point on Monday after announcing 12,000 layoffs after the market closed on Friday. Investors are not buying the stock even though the company is making an attempt to reduce costs. Rather, there was widespread selling early on, with institutional holder, AXA, reducing its exposure dramatically. Essentially, Countrywide, the nation's largest mortgage lender, has so much downside risk, that even massive layoffs (25% of their workforce) could not turn it around. The company has so many non-performing loans on its books and no place to sell their new originations that it could face liquidation itself in coming days.

In the spirit of full disclosure, I have a short position via January 20 put options on the stock. I am comfortable that the stock, currently at 17-and-small-change, will hit 12 within a month.

Happy trading.

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