What happened? Futures were up pre-open, we started strong...and then faded away. It is not a good sign that financials--the very group that was supposed to be helped by the Fannie/Freddie news--are flat to down.
Let's go back to First Principles:
1) The only thing that has consistently worked in the past couple months is to have AGGRESSIVELY, RECKLESSLY shorted financials, and that is what traders are doing today. Yes, some traders did cover their shorts at the open, but they put them right back on again.
2) The actions taken by the Fed do not change the underlying fundamentals. The most important question right now is, when will the housing market bottom? Specifically, what is the maximum loan loss ratio that we will see in this cycle? If we know that, we can make reasonable estimates on losses at Fannie, Freddie, and everywhere else. We do not have this number, nor do we have the confidence to make a projection right now.
3) Absent this confidence, traders lack the buying enthusiasm that is necessary to move stocks off their bottom. Yes, they are oversold, yes under certain valuation metrics they are cheap, but cheap alone is not enough. Not in this market.
Given this misery, Is there any hope short term? Yes. The other major issue besides housing is earnings, and earnings news may be better than expected. There's been lots of selling outside financials on concerns the earnings outlook for the second half of the year will be poor, but the IBM's of the world may not be as bad as everyone thinks.
Yes, financials may be rough with Lehman and Citi and Merrill,but we also have J&J, Intel, and Microsoftthis week.
Meantime, the other minor trade--stay long energy--continues to work, although there was some doubt a week ago. They have since stabilized and are up again today.
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