Free Newsletter: Stalking Stocks with the Shark - Market Surges On Government Actions - 9/21/08

Free Newsletter: Stalking Stocks with the Shark - Market Surges On Government Actions - 9/21/08

Greetings Shark Investors:

There are plenty of hyperbolic words and phrases – such as “tumultuous”, “historic”, “unprecedented” and “brink of financial disaster” – being bandied about regarding the events to close out the week, but there’s no denying that the major indices were able to end Friday’s trading session with big gains after the government took action on several fronts in order to shore up confidence in the financial markets. Following the previous day’s massive late afternoon rally on the heels of various reports about the possibility of a Resolution Trust Corp.-type solution to the mortgage-related debt crisis, indications were for a much higher start to the day as investors reacted to numerous announcements from the SEC and the Treasury Department.

First was the confirmation that the government would initiate a plan to buy mortgage-backed securities and later auction them off in the open market. Meanwhile, the SEC put an immediate stop to short selling in a list of 799 financial stocks and also amended rules related to when and how companies could purchase their own shares. Additionally, and perhaps most importantly, the Treasury Department said that it would back certain money market assets. Over the past several days, anxiety over a potential run on money market funds has been building after news of a handful of large funds “breaking the buck” sent many investors on a mad dash for the safety of gold and treasuries.

So, even though a large part of the ensuing gap was undoubtedly fueled by a huge dose of short-covering, there’s little denying there was a large degree of relief out there as well. After the fireworks of the morning, though, the action calmed down considerably for the rest of the day. After the market gave up some of its initial gains as investors locked in some quick profits, the indices spent the remainder of the day hovering well into positive territory, sporting gains of between about 2% and 4%. By the close, each of the major indices was able to finish higher by 3.6%, on average, on breadth that was just under 5:1 to the positive and heavy volume.

Certainly, there are few who don’t have their own opinions about the actions the government has taken over the past week, and we’ll probably never know if we were on the verge of an honest to goodness financial meltdown. But, outside of the socio-economic implications of this past week’s events, our job as individual investors is to figure out how we should react moving forward.

While some degree of uncertainty has been removed from the market, but there’s also little doubt that the government’s actions will have some unintended consequences. In the end, however, the market will be the final arbiter, and the first thing we need to be watching for is signs that investors are starting to buying with confidence again. Not the sort of run-to-the –safety-of-commodities sort of confidence we saw earlier this year, or the jump-on-financials-because-everyone’s-covering-shorts type action we saw a couple of months ago. Rather, we need to see some real honest-to-goodness buying as we work our way into what is seasonally the strongest part of the year.

The bottom line is that the action over the past week has made an absolute mess of the charts, but if conditions really do start to improve from here, then we should be seeing some better set-ups as we move forward.