Buyers Not Stepping Up

This morning we saw an oversold rally which seemed to be more about short covering than anything else, although there was some encouraging news with the durable goods report. The FOMC announcement didn't provide any spark, and late day action saw the sellers in control. We still have GDP and jobless claims before the open tomorrow. If neither are surprisingly good, the bulls will need to hope that end-of-quarter window dressing and overly bearish sentiment will provide the fuel for a rally. Maybe these circumstances can hold the market steady, but it's difficult to envision a strong rally to end the week.

Looking at 20 day charts for IWM and SPY, in each case price remains in a short-term descending channel.




Taking a longer view, SPY sits just above the 50 and 200 day moving average. We can say it has support here, but price is trending lower, and support can quickly become resistance. SPY has little support below 87.50.



Checking out the financials, Tuesday's low represents important support for XLF. The financials are the headliners in this market, so it pays to watch the price action closely.



- WFC: As California's economy implodes, WFC's chart appears clearly bearish, with price trending lower below the 50 and 200 day moving averages. I am short.



- BAC has been much more stable, and is trading in a narrowing range. Watch to see whether the range expansion takes us higher or lower. This is not something I want to trade, but I see BAC as a bellwether stock.



- COF: Consumer deleveraging is going to get COF in the end. I am short this one, which shows lower highs and lower lows beneath the 50 and 200 day moving averages. I will give it room.



It's still a bit early to be shorting aggressively, but watch those key levels, especially the SPY and XLF support levels mentioned above. Here's a list of possible short setups: SAH, EAT, FDML, DRI, CAKE, ENOC, GPI, SOLR, LNC, PFG, LULU, IPCS, IPI, SFY, TMRK, TNS, PAR, ISLE, CLW, CNW, JAH, MVSN, CTRN.

Meanwhile, over at Credit Writedowns, Edward Harrison asks, now that banks are getting out from underneath TARP, how soon will they be taking back their toxic assets?

So, then, when will these institutions give back the Treasury securities they borrowed from the Federal Reserve in exchange for the toxic waste they used as collateral? Let me remind you of what I am talking about. Do you remember when large financial institutions were forced to go hat in hand to the Federal Reserve when asset markets seized up post-Lehman? Well, these companies had all sorts of Asset backed securities, CDOs and CDOs of CDOs – generally known as toxic waste and euphemistically called ‘hard-to-price assets.’ They off-loaded these assets onto the Fed ‘temporarily’ through mechanisms like the discount window, the Primary Dealer Credit Facility and the Term Securities Lending Facility. The goal was to give the markets time to return to normal, to allow ‘liquidity’ to return to the markets so that these assets could start being traded again.

Why isn’t this happening now?

...But, I am sure you know this is not going to happen. This has not been a liquidity crisis. It is a solvency crisis. The banks are not well-capitalized because the stress tests were just a big charade and an effort to buy these firms time. Moreover, it is painfully obvious that the banks are very much dependent on the government still – or they would be getting their dodgy assets back.

Tyler Durden at Zero Hedge has posted a letter by Rep. Alan Grayson to TARP Inspector General Neil Barofsky. To review, Citigroup paid the US Government $7 billion to "insure" $234 billion in mortgage-related assets. If they're bad, we own 'em.

Among the questions that Grayson is seeking the SIGTARP's assistance on are:

1. How was the deal negotiated by Citigroup, the Federal Reserve, and the Treasury? How does this loss-sharing arrangement benefit taxpayers?
2. What are current mark-to-market losses to the Federal Reserve in this loss-sharing arrangement?
3. What is the current cash flow from these assets? Are these asset performing?
4. Who should be held accountable for the reckless acquisition of a third of a trillion dollras in assets that ended up requiring a government guarantee? [emphasis mine]
5. Which vendors are pricing these assets, and are there conflicts of interest present in these vending arrangements?
6. Is the Federal Reserve guaranteeing assets generated from lender-induced mortgage fraud and predatory lending practices?

Once again, a classic:



I hear so many people, experienced investors included, complaining about the socialization of medicine when their pockets just got picked clean by the crooks on Wall Steet. People gnash their teeth over stimulus expenditures, which actually create useful infrastructure and jobs, and meanwhile megabanks and the Fed in tandem use sleight of hand to rob the taxpayer of sums that far exceed the stimulus and healthcare packages combined. The horror, some poor kid might get free healthcare, but by all means, those, banks, they need our money...

Meanwhile, Jim Grant of Grant’s Interest Rate Observer continues to tell us that the Fed is severely undercapitalized.

A quick note: I just became a Gold subscriber at Rob Hanna's Quantifiable Edges. If you are not yet making this site a regular part of your trading routine, I recommend the free trial. You get a nightly overview of key indicators (which is an education in itself), plus the relevant statistical studies for the day. This morning's post examines historical price action when a SPX experiences a 2%+ point drop, followed by a weak rebound the next day, which describes the Monday-Tuesday action. I believe you still get the nightly newsletter with the Silver subscription, which is a bargain.

Jimi plays us some acoustic blues: