Tuesday, September 16, 2008

It ALL Depends on AIG

I am not going to put up any charts tonight because I continue to think technicals don't matter as much in this current environment. There are just too many news events that are going to drastically affect the near-term course for this market to put too much emphasis in charts. Once we get past all this news, then I think the technical side of trading will become valuable once again.

In terms of AIG, it seems like everything hinges on what happens to them. I found this bit on Bear Mountain Bull - he posted it from Financial Sense and written by Frank Barbera. I thought it was a great description of where we are at right now.

"For the last few days, the US Financial system and perhaps, the global financial system, has moved to the brink. Events surrounding American International Group (AIG) seem to have brought this crisis to a head. A global titan with operations in over 130 countries, AIG’s insurance business has counter-party risk relationships with virtually every major institution in the world. Words probably cannot accurately depict how serious a problem the implosion of a company this large would be for the greater financial community. Thus, it is putting it mildly to suggest that at the moment, a great deal depends on whether AIG can receive the funding it needs to avoid a further downward spiral. Such a spiral would undoubtedly trigger a torrential chain reaction of counter party defaults in the CDS market which stands at more then 40 Trillion in notional value. In the case of the demise of AIG, the word ‘melt down’ is of the few terms that would apply with ripple affects spanning the globe.

Thus, as markets wait to see if AIG can bypass its liquidity problems, it is very clear that a large move, either straight up (sigh of relief), or straight down (abject terror) is in the offing."

I guess Warren Buffett was right when he said derivatives are "weapons of mass destruction".

So what do we as traders do? Well, for me, I think think staying in cash is still the best strategy here. I mean, really, do you want to be short C and WB when/if it is announced that AIG has been bailed out by the government, which no doubt will cause a large short-covering rally??? In the same vain, do you really want to be long a bunch of stocks when/if the government keeps its recent backbone, doesn't back AIG, and the company files bankruptcy, setting off a chain reaction of let's just say very bad things, causing the market to really tank??? I know I don't. There is still just too much risk out there relating to these news events, so therefore, I think having the discipline to stay out of things until the path becomes clearer is the right move right now.

In terms of my scans, I did see a few more longs pop up tonight but my BOP scans hit a new low for the year on the long side - not really what I want to see if we were really at the start of a new bull market. I see a few that I like the look of - CLNE, STSI, EHBI, ICAD, TACT, NPSP - as possibilities. Overall, the quality of longs I see is not good, however, and until I see more set up, with really good volume patterns, I can't get too optimistic here, even with a bullish-looking reversal put in today on the indices.

It is possible we put in a short-term bottom here, and again, if the news somehow plays out positively the rest of this week, then it probably will be a bottom. However, check out a chart of any major index and look at January 9, 2008. The market was down big the previous day, opened much lower, and then reversed to put in a large gain for the day. Sound familiar? It didn't quite work out for the bulls, however, as it only took four more days for the that reversal bar to be broken to the downside and another very sharp move lower took place. That could certainly happen here, with us getting a true washout that gives us a good, tradeable bottom.

I guess what I am trying to say is be open-minded and be ready for anything. I have a watch list of longs that I will watch, and if we get some resolution of the news issues, I would be OK starting a few positions in them to catch an upswing in the overall market. I am also watching some shorts that I will focus on if we make another move lower. I don't have a bias right now and am ready to go when the market tells me it is ready to go as well. Good luck Wednesday.

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Anonymous said...

How long do you think we have to wait for AIG bailout announcement? is it possible that the waiting could go for months?

Mac said...

It seems like we have one - at least that is what a lot of places are reporting. There have been so many rumors this week however that believing anything you here is hard to do right now. If indeed this is settled, then I think we could rally a bit. My only question is that if this is a loan, isn't it just putting off the problem for a little longer??? How many times can the government come to the rescue???