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BANKING SECTOR RULES
By Dr. John L. Faessel
ON THE MARKET
Commentary and Insights
Dr.Faessel@onthemar.com
Wednesday - 3/11/2009
Yesterday the stage was set for a stock market rally - and we got one. In fact it was a beauty. A confluence of market moving news ignited a massive reversal fired by a big increase in volume and panic selling by the shorts. Sentiment and oversoldness were stretched to historic levels of dread and dismay; a perfect backdrop for the extraordinary snapback surge.
I've been of the opinion that this was brewing for a while, so now the question is; was it a one-day event? What we should look for here is a “follow through up day” over the next 4 or 5 days, and it should be a big volume affair. Considering, that the focus financial/banking sector was so reviled by the market, then suddenly the possibility loomed that they (the big banks) won't be nationalized and in fact that they're operationally* doing pretty well. Minus the toxic asset question, there is a whole new ball game out there and abruptly a major rethink is now the order of the day. I think this rally will have legs, at least along the lines of the 12%, 14% and 24% rallies that have marked the trading since the September blow out. Other factors in the markets entrails lend additional underpinnings to the structure of the "possible" market rejuvenation. Some commodities are perking out of bases, gold has collapsed, and China is on a roll; now add a “stabilized” banking sector and this “re think” could turn into a significant short squeeze experience of major proportions.
Resistance lives at S&P 500 (SPX) 724 and looks to be tested today with the pop from the futures. I've mentioned before that (SPX) 740 looks like a doable target to me. There is support at (SPX) 707 and 690.
* Citigroup (C) jumped 38% yesterday after a report from management that they have an operating profit so far in 2009 (2 months) and are having its best Q-to-date performance since the Q3 of 2007 — (excluding likely write-downs and loan loss provisions.) Recently Bank of America (BAC) and Wells Fargo (WFC) and JPMorgan (JPM) have said about the same thing. Recall that Warren Buffett in his extended interview on Monday also laid heavy that the banks are generating lots of cash because of borrowing low and lending high (yield curve.) Another interesting tidbit I’ve heard; Wells Fargo has had a huge 12% rise in deposits since the first of the year. By the way, take a look at the yields on the preferred stocks of the big banks mentioned above. Also check the yields on the preferred's of Deutsche Bank and ING. They are astonishingly high, and of note; Pimco's Bill Gross has them as some of his top picks in the recent Barron's Roundtable.
Also Fed boss Ben Bernanke Ben reiterated pledges and stressed that the government won't let big financials fail in the current climate. But, he said a regulatory overhaul should boost capital and liquidity requirements for banks deemed too big to fail. Ben also repeated that there's a "good chance" the recession could end in 2009 if government efforts to stabilize financial markets work.
Tomorrow Congress is taking up the "mark to market" issue and they are also reviewing whether or not to reintroduce the up-tick rule. Barney Frank said that the up-tick rule on short sales will return.
The magnitude of the stock market reversal was positively spectacular as far as raw numbers; NYSE ups were 2,933. Downs were 230. Upside volume was 2,093,295. Down volume was at record low I think at only 78,000.
These lopsided numbers had a dramatic effect on the McClellan Oscillator (favorite overbought / oversold indictor) that came in at a minus and now neutral 70. The last string of postings in the McClellan were all extremely oversold and worth noting; (minus and deeply oversold) 258, 241, 250, 151, 297, 294, 194, 174, 197, 196, 366, 298, 257, 219, and 178.
If you recall I had mentioned the "out of the ordinary" configuration in the McClellan chart that had illustrated a "higher low" set up. Preceding set-ups such as this had been predictive of major rallies in the making.
The (VIX) (FEAR INDEX) closed at 44.
The CBOE Total Exchange Volume Put / Call Ratio was an unusually low 0.73 after Monday’s 0.74. I believe that these low postings in down markets had begun to suggest that the use of the puts for portfolio insurance had waned as players were out of the long-side of the market.
The Treasury 10-year note rose 10 ticks to yield 2.98%.
Great looking chart of the day:
Ultrapar Holdings, Inc. (UGP) $25.56. NYSE. Broke out of a nifty 6-month base on 2X average volume. (after a major retrench back in September.) Has an Earnings per Share rating of 85, a Relative Strength rating of 86. Has a market-cap of $3.4 billion and has $1.07 billion in cash. (Cash per share of about $8.00) Another plus is that only about 15% of the shares are held by institutions. (UGP) is a major Brazilian holding company and it's Brazil's largest distributor of liquefied petroleum gas and second-largest distributor of gasoline. Through its subsidiaries it distributes liquefied petroleum gas to residential, commercial, and industrial customers primarily in the south, southeast, and northeast regions of Brazil, as well as engaging in oil refining. Web Site: http://www.ultra.com.br
Dr. John L. Faessel: Dr.Faessel@onthemar.com
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