Ben Bernanke And A Trade Triangle

Big day in the market today!

Just as I go on record anticipating some additional downside, Mr. Bernanke steps it to add liquidity to the financial markets. The Fed is now accepting the mortgage backed securities, that everyone has all but written-off as near worthless paper, as collateral. Yeah, the same paper that Citi and Merrill can't sell is now accepted by Ben Bernanke and company as collateral.

So, what's really going on here? Politically, a bail out of this mortgage mess is a tough sell. The public questions why individuals who over extended themselves and banks that made bad lending decisions should be bailed out on the taxpayer's dime. Seems like a reasonable question, and one that Congress is likely to have difficulty with if they try to legislate a solution.

Today's announcement is part of a scheme that shifts risk out of the private sector and onto the books of government entities. The Fed will likely wind up owning a lot of that worthless paper they take as collateral and there ain't no stopping it now. The upshot is that the market receive a shot of liquidity in the arm to help it through this credit crunch.


The chart above is of the S&P 500. As you can see from the oscillator, the broad market had been over sold and was due for a rally. I touched upon this in my last post, but my expectation was that we might get relief for a day or two before heading lower.

Today saw the DJIA power up over 400 points, which is something we have not seen since the market's bottom in March of 2003. The S&P made a similar move today.

You'll note that we have a green "trade triangle" following today's action. This is a bullish indicator from the MarketClub service, but because we've been trending down (pay attention to the slope of the moving averages) you may not want to bet heavily against the prevailing market trend. It is a good opportunity to close short positions, however.

We want to see a follow-through day as confirmation of a bottom having been reached. Until then, it is probably best to "keep your powder dry."

Trade well.

Christopher Smith
TheOptionClub.com