Dead Cat Bounces - Market Pops Up 3.6% For the Week
Market's performance last week was impressive by any measure
July 20, 2008
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By: Jerry Cole - Retirement, Investment
Call it what you wish - a bear market rally, a dead-cat bounce, a short-lived rebound etc.. - the fact is the market's performance last week was impressive by any measure. Falling oil prices, better-than-expected earnings reports by several major financial institutions, and a new short-sale rule imposed by the Securities Exchange Commission (SEC) all combined to bring the Dow Jones Industrial Average a 3.6% gain for the week.
Some analysts will tell you that it is common for rebounds - sometimes strong ones - to punctuate a long market decline.They will tell you that after 2 and a half months of sharp declines, stocks were overdue for a temporary bounce. They will tell you that bear markets usually end in despair with investors abandoning stocks in massive numbers. Whatever the rationale, you will always have two sides to the story. Otherwise how could we have a market at all?
To be sure, there is something to be learned by what has happened in the past. The problem is there are so many variables in the economy and the geo-political status of the world, that no two times are alike. You have to search for the most likely candidates to determine the cause for the latest market move. You then have to decide on the best strategy that fulfills your investment needs.
One likely candidate for last week's positive move was obviously oil. Crude prices closed lower Friday for the fourth consecutive day. However, we won't see prices lower at the gas pump right away. Don't ask me to explain why, because I can't. But another,not so obvious, candidate lies in the Securities and Exchange commission's new rule designed to limit certain negative stock bets. Last week the SEC said it would tighten short-selling rules for 19 financial firms, including the large government sponsored mortgage firms Fannie Mae and Freddie Mac.
In a short sale, an investor borrows stock and then sells it, in hopes that it will later fall in price so it can be repurchased at a profit. This is a perfectly legal strategy used by many investors. The SEC is not opposed to legitimate short selling only "unlawful manipulation" through naked short selling that threatens the stability of financial institutions. In naked short selling, the trader has not actually located the stock to be borrowed, but goes ahead and conducts the sale anyway. This is illegal.
The new Federal crack-down on short-selling will require traders to make formal arrangements to borrow the shares before selling them. The mechanics of such arrangements will bring on new expenses for financial firms but should also dampen the sometimes run-away selling of certain financial firms. Indeed, the shares of the 19 financial institutions covered under the SEC's emergency order bounced back since it was announce Tuesday.
However, there is now concern that short sellers will turn their attention to financial institutions that are not covered under the order. The American Bankers Association, a trade group that represents the interests of 8,500 banks has stated such fears. The ABA also stated it fears the emergency order could further exacerbate a loss of confidence in the safety and soundness of this country's banking industry.
In any event, the order, along with reports showing surprising strength by large financial firms Wells Fargo, J.P.Morgan Chase and Citigroup buoyed the market last week, served to calm the jitters in our financial system and had some investors believing there are signs the credit crunch could be bottoming out. This would be a welcome turn of events.
It is important to control your fears in a fearsome market such as we have experienced since early May. The stress hormones make us hypersensitive to any further danger. You can't be an intelligent investor if you are thinking with the panic button in your brain. You have to remember that the countless people who bailed out of the market in the terrible plunge of October 2002 missed out on the generous returns of 2003 through 2007, when stocks returned 12.8% annually.
In the meantime, be sure to keep your risk within your tolerance and keep ahead of inflation.
I invite your questions.
Or Contact Jerry Cole at:
(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation or of www.mybaycity.com)
509 Center Ave, Suite #102, Bay City, MI
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