Market turnaround?

Has the Wall Street turned the corner? Or, is this a dead cat bounce-type scenario? The Financial Times reported the scene in U.S. capital markets that, By the close, markets had rebounded. The S&P 500 was up 4.3 per cent at 1,206.51 and the Dow Jones Industrial Average up 3.9 per cent at 11,019.69. The Nasdaq Composite rose 4.8 per cent at 2199.10. 

The reasons appear to be, The prospect of the creation of a Resolution Trust Corporation-style plan to deal with the turmoil in financial markets led stocks to their biggest rally in nearly six years late in the session.

A violent swing in financials reversed the rout of the previous day as investors responded positively to the prospect of a Treasury plan similar to that which helped bring an end to the savings-and-loans crisis of the 1980s and early 1990s.

Earlier in the session, the market fell as much as 2 per cent, as concerns lingered over the short-term funding of financial institutions even after a liquidity boost from central banks.

Yet stocks later rebounded on the possibility that US authorities might follow their British counterparts by banning the short-selling of financial stocks. A second wave of buying came towards the end of the day.

Marc Pado, market strategist at Cantor Fitzgerald, said the move could help liquidity, without which several “firms are dead in the water”. He added “shorts would be really hung out to dry” ahead of quadruple witching tomorrow, the day on which contracts for stock index futures, stock index options, stock options and single stock futures expire. 

The situation is very fluid, of course. Many may recall that in 1998, Malaysia emulated the U.S. government strategy of the 1980s by setting up Danaharta. Danaharta was modelled after the Resolution Trust Corp, the vehicle created by the U.S. government to bailout the Savings and Loans institutions that were in serious crisis in the 1980s. The possibility of this move has reverberated positively in Wall Street. 

But should we jump back into the water in light of this positive Wall Street "recovery". In this case, the idiom that applies is, one swallow does not a spring make (or, something like that), meaning we should adopt a cautious wait-and-see attitude. The bovine bearish sentiment is easily spooked and, judging by the amount of news coming out on each of the financial giants, the possibility of negative sentiments returning to Wall Street recurring is still quite high.