13 October, 2008

Markets Rebound Monday on Government Plans for Financials

Rebound Day? Or the start of something market-wide? That was the question facing Traders Monday morning following a wild weekend where Finance heads of the G7 met and came together on ambitious plans to cure economic ills around the world.  European governments vowed to guarantee all inter-bank lending and the US Treasury announced its intentions of buying into healthy banks to shore up liquidity and get credit moving throughout the economy.

Coming off the worst week for the stock market in a lifetime, and a Friday which saw the Dow see-saw over 1000 points in a single day brought analysts out of the woodwork uttering "capitulation". The market term is the English equivalent to Gold for Bullish Traders as it signifies the end of the end.  In other words, capitulation days typically lead to a buying rally in the short term.

It seems to have all come together for buyers over the weekend with Europe's unified stance on the banking sector, including Germany, France and Spain coming together to pledge $1.3Trillion to guarantee loans between banks and to purchase stakes in Financial companies. This dramatic effort was seen as necessary to avoid the kind of Financial failure throughout Europe that was seen over the last months in the United States.  The unified commitment in Europe led to further plans coming from the US Treasury leaving Monday morning trading in an almost euphorically positive frame.

By no means is the situation going to correct itself in a day.  The credit situation is hitting businesses of all sizes, causing stagnation in the job market, stagnation in productivity and in-turn sales.  The steps by Governments around the world are the beginning, and as money precipitates through the system it will eventually come out of the system as new loans to businesses and individuals. Credit will loosen, productivity and job growth will turn back to the positive side of the spectrum. The big question is when the little guy sees the results?

Markets, always look forward and the positive signs are aplenty today, with the Dow up nearly 600 points, the Nasdaq up 120 points and the S&P up 60 points by the middle of the trading day.  It'll be important to see whether the Bearish tone of late doesn't overcome the early gains towards the end of the day.  If buying like this can be sustained on high volume Traders will see that as a big positive, signalling that last week's downturn was in fact the result of fear-mongering rather than trading to valuation.

With two and a half months left in the trading year, and plenty of Investors sitting still on the sidelines, is now the time to think about getting back into your favourite stocks on the cheap? Was Friday indeed that day of capitulation? Will the Government plans begin to take form and alleviate the credit problems suffering the nation in the short term? All valid questions that only the next few weeks will tell. However, seeing the signals today, it's clear more Traders are starting to lean towards 'Yes' across the board.

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