Today’s Market Reversal - January 15th
The stock market staged a reversal this afternoon:
I don’t know of a specific catalyst for the reversal. The only candidate that is plausible were the details released this afternoon about what exactly Bank of America was seeking from the government:
The government is near a deal to give Bank of America a $20 billion capital injection and potentially absorb about $100 billion in losses on toxic assets, people involved in the transaction said Thursday.
The bank had been pressing the government to help it soak up $15 billion to $20 billion of write-offs so that it could offset a groundswell of its own consumer loan losses and complete its acquisition of Merrill Lynch, the giant brokerage firm, according to people briefed on the talks. In exchange for the new support, the bank will cut its quarterly dividend to a penny from 32 cents, and accept new restrictions on compensation.
I’m not sure that’s what turned the market around since it certainly doesn’t sound like good news, but its all I can really find. The only other possibility is that it is an options expiration week and some were unwinding positions ahead of Friday’s expiration. If that’s the case, the reversal doesn’t mean all that much.
Intraday reversals like this have often marked short-term bottoms, so technically speaking this could be important. Let’s see if we get some followthrough tomorrow.
One final note: In exchange for more capital Bank of America will cut its dividend to almost nothing. The stock did rally this afternoon and the dividend cut may have been the catalyst. I can’t understand why these banks are still paying dividends at the current rates when they are capital constrained. I suspect that dividend cuts at other banks would also be viewed positively since it would lessen their need to raise new capital.
- January 15th
That was a reversal???
Bailout is why:
http://finance.yahoo.com/news/Stocks-regain-ground-as-hopes-apf-14078470.html
Ken,
Yes that was a reversal. Quite a nice chart pattern actually. In Japanese candlestick charting its called a “hammer”. It would have been better to close on the high but it still qualifies.
Guiron,
Well, as I said in the post, that’s what it seems like, but it seems unsatisfying somehow. After what was just done to save Citi, it doesn’t make sense that Treasury would let BAC go down. Furthermore, BAC had already taken money in the first round of TARP. Did anyone really believe Treasury would let them fail and prove a TARP a failure? Seems politically impossible at this point.
I actually think the options expiration might be a better explanation. If the option market makers have been on the other side of all the recent put buying, that means they are short puts. The ofsetting hedge trade for short puts is short stock. To close out their short put positions and take off the hedge, the market maker would need to buy stock to cover the short stock position. Also, after the big market selloff the last couple of weeks, even if the market makers roll out another month, they would probably reduce their hedge. To my knowledge, option market makers are not generally dynamic hedgers who just add to their shorts all the way down. They are more risk oriented.