Choppy Week of Trade Dominated by the Constantly Shifting Tide of the Financial Sector

Important Announcement:

Good day! Just a reminder: The "Daily" Market Action Letter has become a weekly letter at this time. It will resume, however, as a regular daily column on September 22! In the meantime, I will be resuming the Weekly Market Action Video, which will be updated each weekend by the open on Monday is posted at the following url: http://www.tonihansen.com/marketactionvideo/.

All my best,
Toni


Choppy Week of Trade Dominated by the Constantly Shifting Tide of the Financial Sector
(Note: Unless otherwise stated, the index action described below relates to the EMini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.)

Volume was heavy in this past week of trade, coming on the heels of the government takeover of Fannie Mae (FNM) and Freddie Mac (FRE), which was announced this past Sunday. Financials were very hard-hit this past week and the increased activity in this sector accounted for a lot of the volume influx. On Friday alone American International Group Inc. (AIG) closed lower by 30.8%, while Lehman Brothers (LEH) fell another 10.9%. AIG opened on Monday at $24.47 and closed on Friday at $12.14 for a loss of about 50%, while LEH opened on Monday at $17.62 and closed on Friday at $3.65 for a loss of nearly 80%. One of the few exceptions in an industry that was pummeled was Zions Bancorportation (ZION). It gained 11.5% on Friday and closed at $37.47 after closing the previous Friday at $32.97.

After the FNM and FRE news on the 7th, the focus shifted to the fate of Lehman Brothers (LEH). It has been heavily invested in assets tied to bad home loans and word had spread that it had put itself up for sale. On Friday evening the New York Fed called an emergency session was convened to discuss how to rescue the troubled company. The meeting continued throughout the weekend. Those present included officials from the Federal Reserve, the Treasury Department, and executives from several Wall Street banks, including Citibank, JPMorgan Chase, Morgan Stanley, Goldman Sachs, and Merrill Lynch. Missing from the mix were representatives from Lehman Bros itself. U.S. Treasury officials stated that the government would not bail out the company and other efforts would need to be initiated to prevent its collapse.

Also subject to discussion were similar problems at American International Group Inc. (AIG) and Washington Mutual Inc. (WM). Despite the expected upheaval ahead of Monday's open, it caught many by surprise when Lehman, recently the number 4 U.S. investment bank, announced that it was filing for bankruptcy. Shares of S&P 500 futures were down 3.4% after they opened for trade Sunday evening. The Lehman bankruptcy will be the highest profile bankruptcy since 1990. Even more of a surprise, however, was Bank of America's (BAC) buyout of Merrill Lych (MER) for $29/share. This is almost $12/share higher than where it closed on Friday.

The recent maneuvering in the financials has many on edge that the takeover of FNM and FRE was not enough to flush out the financials and turn the tide, but rather still the tip of the iceberg with more surprises to come. This sector has been the area for higher risk speculators for the past year and has escalated as such since the buyout of Bear Sterns. Lately that risk is higher than ever. At the moment of greatest fear, panic, and disillusionment will come the shifting tide, but far less volatile markets will provide greater security if your focus is greater than the intraday market action.

Nasdaq Composite ($COMPX)


Although the financials certainly fell apart this part week, the rest of the market managed to hold up fairly well. This was mainly thanks to the large gap higher on Monday morning. When the day began on Monday, we were again experiencing a substantially larger-than-average gap in the indices. In last week's column I laid out how such gaps should be approached. To begin with, mark the first 15 minute highs and lows. When one of those gives way, the market is most likely to continue in that direction throughout the morning. Often the trend will continue past the morning as well. I had been leaning more towards a continuation higher last week, but the panic in the financials obviously had not quite ran its course. The indices did not even wait 15 minutes before they began to sell off. The bias had shifted on the all-sessions charts and helped it roll over off premarket highs into the open.

The 15 minute lows broke in the indices soon after that time had passed. The Nasdaq Composite ($COMPX) closed its gap because its heavy tech influence left it reacting less strongly to last Sunday's news. The indices continued lower into noon with the S&Ps nearly closing their gap, but the mid-day support held and the market recovered somewhat into the afternoon before resuming the selloff the following day.

Dow Jones Industrial Average ($DJI)


The Nasdaq became rather interesting on a 60 minute time frame on the 9th. That afternoon it established the third low in as many days. It barely broke through low from the previous day on the move lower that third day. This had been the case the day before as well and this action shifted the momentum on the 60 minute chart as compared to the selloff of the prior week. The resulting pattern is a bullish one. It was supported by the fact that the volume was lighter going into that third low than the previous one. One implication of this was that fewer people were using the break of the previous low to short. Another is that the break of the previous low was causing less panic than the earlier one, meaning that many of those holding on the long side were more secure in their conviction than when it busted the prior low.

The S&P 500 and Dow Jones Industrial Average did not experience a similar shift in momentum. The market had gapped lower again on Thursday, but the Nasdaq was better-positioned to cope with such a gap. As on Monday, the 15 minute mark passed without the indices able continue in the direction of the gap. The break in the opening zone highs led to a buy setup that kept the market moving higher throughout most of the session. Thursday closed in the zone of the day's highs. This was resistance on a 60 minute time frame, however, and the indices fell into a range into the weekend.

For the week as a whole this past week the Dow gained 1.9% to close at 11,421.99. Alcoa Inc. (AA) and General Motors (GM) stood out in a positive light on the day on Friday after two days of upside. The S&P 500 gained 0.8% last week, ending on Friday at 1,251.70. The Nasdaq Composite rose 0.2% and ended the week at 2,261.27.

S&P 500 ($SPX)


Meanwhile, crude oil hit the initial price target zone we have been following over the last several weeks, testing the $100/barrel zone briefly. The prices can still push in the $90/barrel zone, but an initial reaction to whole number level should be expected. Another market we have been following closely is the euro. It has also held support and bounced quickly higher into the weekend while the dollar fell sharply off highs. These levels should both hold for the time being and are likely to lead to larger weekly corrections at this time off these zones.

As far as the broader market is concerned, it will not take much at all to break to new lows on the month. The session will begin on Friday with another larger-than-average gap and will be subject to the same rules as this past Monday. In other words, pay attention to those first 15 minutes. Both this past Monday, as well as Thursday are good examples. The bias tends to go in the direction of whichever way that first 15 minutes breaks with relatively few exceptions.