Market opened on large positive gap and rallied the first hour of trading to the 800 resistance level. Then price oscillated above and below that level without any clear direction until 2:15pm when volume exploded taking price to the upside huge and ending the day printing a +7.08% day for the S&P 500 Index. Volume was high and still trending down.

S&P 500 Index 5min Chart

S&P 500 SPDRs 5min Chart

Treasury Secretary Timothy Geithner released more details on the toxic asset plan and several large investors said they would of course participate in the free money hand out. Also existing-home sales increased in February boosting market sentiment. The result was a huge rally taking in one move the retracement of the previous 2 trading days, the 50 day SMA in the S&P 500, the downward trendline from the early January top and the 800 resistance level.

As things stand now the Financial Sector and in particular large banks may be the best investments forward. The Federal Reserve has created an environment where banks make money just by existing. Today we can safely add that the toxic asset plan will clean their balance sheets. The result is a risk free investment on healthy money-making banks that at some point will generate large wealth for their shareholders. This situation will not change as long as the Federal Reserve maintains near-zero interest rates. Federal Reserve Chairman Ben Bernanke has stated that near-zero interest rates will be the norm for a long time. Thus explaining today’s rally in the Financial Sector. I am clueless as to why the rally was broad-based. This will undoubtedly ease credit overall but the economy will still take years to recover and inflationary fears will ensure that the Federal Reserve will act promptly and decisively to counter any economy overheating thus ensuring that any future growth will be slow.

The only problem I can see in this mini-essay is the answer to the following question. At what price the banks will be willing to sell their toxic asset?. If at a price below current markdown levels then the thesis of a healthy well capitalized banking sector fails but so does the Government plan to ease credit. If at a price consistent with markdown levels then the danger of future shareholders dilution still hangs around and will ultimately depend on how quick does the economy recover and on how well management does in each bank. If at a price above markdown levels then it will serve to capitalize the banking sector without nationalizing it (isn’t this ultimately the aim of the administration?) thus resulting in the scenario pictured in the above mini-essay and the outcome I see most likely.

S&P 500 Index Daily Chart

Filed under:
Market by LtPinback | Permalink | Share This