Monday, March 16, 2009

Dead Cat Bounce or Turning a Corner?

Last week was the best market week we've seen in many months. What changed, if anything, to produce the buoyancy? There are a number of reasonable explanations, and a few popular explanations.

1. The chairman of Citibank declared they were making money. That pronouncement from an internal memo, conveniently leaked, strikes me a blantant effort to inject "confidence" where none has been warranted. Citibank has always made money on an operating basis. Borrowing at 1% and lending at 5% is profitable. There is the "minor" issue of losing value in the collateral by the billions that was not addressed.

2. Technical oversold conditions. Each day tens of millions of shares change hands for non fundamental reasons. For the past year, it has been a profitable trade to be short. Sell on the bounce, cover on the dip, rinse and repeat. Last week the market reached a very oversold condition. Shorts covered, whether true buyers emerged is still questionable.

3. Bernanke made noises that the recession was going to end, as one headline stated, "shortly." Another trumpeted that the Fed chairman feared the political will was lacking. You decide.

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