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Thursday, August 23, 2007


strategizing the bounce

via herb greenberg and minyanville, some insight into the potential consequences of the credit crunch from the options market.

"There is a huge dichotomy in the marketplace. On one hand, the market in general is being bid back up while government officials try to reassure investors as to the soundness of the financial system. Some of the same officials that originally didn't see a problem. On the other, investors are paying prices in options on bank stocks and other financials that indicate bankruptcy. We can't have both. This is not a "wall of worry". I have never seen option prices this high in big captitalization financial companies. Take what you want from that. Either the stock market in general is going to correct massively, or the buyers of this protection are really making a mistake."

i don't think we can know which, but i must admit the general sense that the credit crunch is easing (which is very easy to feel in equity markets media right now) seems in such contraposition to the ongoing facts (the credit markets remain in lockdown) that i remain highly leery of the recent bounce. it feels utterly stage managed.

look at the s&p intraday.

virtually all the gains of the last four days have come at the open -- from the futures market indications or orders executed within minutes of the bell. within the day itself, prices have been sideways or down. in my recollection, big bullish days see buying throughout, just as big bearish days see selling throughout. (this needs more research.)

what has happened thusfar in the equity indexes remains well within the parameters of a normal bounce in an ongoing correction, staying (so far) under the ceiling of the 21-day moving average of the close.

but what is happening in the credit markets is potentially a huge disaster that will very likely take many months to resolve. calling it "over" at this point seems an act of sheer denial to me. bank of america essentially bailing out and initiating a takeover of countrywide is decidedly not good news, but it is being treated as such. four majors in a coordinated destigmatisation of the discount window is not good news either, but is also being spun as such. many people are actually talking about m&a like it's going to come back, like there isn't a huge pile of pier loans choking the system for the foreseeable future. david callaway get it right on both counts, i fear.

what to do, then? fade the rally -- i went short(er) at yesterday's open in anticipation of a retest of the lows, at the very least.

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