Securities Research Services

Thursday, September 25, 2008

This is NOT Business As Usual

Under normal market circumstances it is possible to come to a relatively reasonable conclusion about the market’s potential just by paying close attention to price and volume. For example, when the Fed is getting ready to act institutional money usually has a pretty good clue about how that action will affect the future outcome of the market and they tend to build positions accordingly. When they are building those positions they tend to leave footprints, sometimes subtle, that betray what they are doing.

What is different about the situation this time is the fact that the major game changer that the market is waiting on is in the hands of Congress. Congress isn’t nearly as predictable as the Fed.

It seems likely that the market will rally, at least initially, if a government bailout plan is passed. But what happens if that bailout plan is delayed? It’s altogether possible that positions taken here in anticipation of a bailout rally could easily get stopped out as the market drifts in wait for Congress to vote on this bill.

So which side do you put your money on here? Do you bet that Congress will drag its heels and short the market? What happens if Congress surprises and the market gaps up 400 points?

We really hate the odds on this. Moreover, it appears that institutional money doesn’t like the odds either as market volume and volatility have both been way down over the past couple of days.

If the bailout is announced wouldn’t you rather have a large cash position that you could then put to work after the market shows its hand in response to the package? Wouldn’t it be much worse to bet on a bailout, get stopped out as the bailout is delayed only to see the market gap up a few days later?

This is the hand that the government is dealing us here since they determined they would get involved in business that is probably not theirs to get involved in in the first place.

Recommended Position: Cash

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