Free Newsletter: Stalking Stocks with the Shark - Conjecture Over the Fate of AIG Drive Tuesday's Action - 09/16/08

Free Newsletter: Stalking Stocks with the Shark - Conjecture Over the Fate of AIG Drive Tuesday's Action - 09/16/08

Greetings Shark Investors:

The major indices were able to regain some of the ground it lost at the beginning of the week on Tuesday in what was one of the most random and rumor-driven trading sessions we’ve seen in quite some time. Early morning indications were for another rocky start to the day as concerns over a possible failure of AIG continued to grow and DELL said that they see “further softening in global end-user demand” for the third quarter after having already cited such concerns when they reported earnings just a few weeks ago. Sentiment was pressured further as we headed towards the opening bell following a very poor reaction to GS’s earnings report in which they beat earnings estimates but missed revenue expectations as well as news that the research firm Argus had nearly halved its price target for MS as well as

As such, the market opened the second day in a row posting steep losses, but as was the case the previous day, the dip buyers were waiting in the wings to pounce on the weak open. From the get go, investors moved to take the indices off their early lows and back towards the unchanged mark. Following that initial improvement, the averages spiked into positive territory after CNBC reported rumors that a government-backed loan for AIG was back on the table. But, that foray into positive territory proved to be short-lived after the same news outlet said moments later that a private sector rescue of AIG was dead and that the most likely outcome for the world’s largest insurance firm would be bankruptcy.

After that little whipsaw, the action calmed down considerably as we headed towards the Fed interest rate decision. Typically, the trading on such days is dominated by the FOMC news, but with AIG’s fate hanging in the balance, investors were understandably distracted. Moreover, with the possibility of a failure of a massive financial institution looming and a credit market that was beginning to freeze up once again, it’s likely that market participants understood that the level of interest rates has little bearing on the bigger picture at the moment.

Still, fed fund futures were indicating that the market was expecting a 25 basis point cut, and when Dr. Bernanke and his crew decided to keep rates unchanged, citing inflationary concerns, the averages quickly sold off. However, they bounced right back following yet another rumor that the Fed might actually come to AIG’s rescue – for real this time.

Apparently, the source was strong enough for this last rumor, because that triggered a final wave of buying which allowed the indices to finish the day at highs with gains, on average, of 1.44% on heavy volume and breadth that was essentially flat.

Without a doubt, it was quite difficult between the bells to really get a sense what market players were looking for or how they expected events to unfold. Certainly, a failure of AIG would be a major market negative, and as we write this, overseas markets are rallying on news that the Fed has agreed to lend the firm up to $85 billion so that they can meet their immediate obligations. But, are investors really hoping that this will mark a bottom for the market, or will they simply use any reflexive strength to do some more selling? We’ll have to see how that plays out, but that’s exactly what happened after the FNM/FRE seizure two weeks ago.

Regardless, our job as individual investors is to figure out how we’re going to deal with all of this uncertainty and volatility, and that is dependent on your own personal time-frames. While a news-driven market does present good trading conditions for those who have the shortest of time-frames, the bigger picture has not changed. We’re still a long was away from being in a market where we can build longer-term positions. There’s absolutely no rule saying that we have to be placing bets in an environment where we have no edge whatsoever.