Here's where we are. Though there's been no formal announcement, the Financial Accounting Stardards Board (FASB) has announced a new system of accounting that will allow banks more discretion in valuing unsaleable assets. This is good news for the affected financial institutions as it enables banks to revalue their toxic assets using looser standards for their first quarter 2009 filings. This will allow banks to potentially show a profit on operations and avoid a massive sell-off that would have otherwise occurred. This does nothing to save the banks, but is a political move that buys them some time. The International Accounting Standards Board has not yet adopted this practice, but is expected to comply. A formal announcement will likely be made next week. This accounts for a lot of the strength in the financial sector yesterday and today.
Though we got bad employment news, the market rallied on home sales. The dark dirty secret is many, and in some cases most of these home sales reported are in fact banks bidding on their own properties at the foreclosure auctions at the loan amount to keep the assets on their books at a high price. In fact, for example, of the 342 home sales in Boise, Idaho this last quarter, only 23 were purchased by third-party buyers. The rest of the sales were purchased by the lenders; i.e., the banks themselves. Eventually, this will affect the market badly, but in the mean time, the market likes it.
There are two graphs on the adjacent pop-up. The top graph explains the the 2-2 rule. For the current bearish market turn-around in effect, we have the 2-2 rule, which basically says if the overall price differences for the last two down-days are larger than the than the last two prior up market days, then the bears have over-powered the bulls and the market is in the process of a turn-around. The market turn-around met this rule a couple days back.
This brings us to the bottom graph, which analyses the 4-4 rule. The 4-4 rule provides confirmation of this intermediate bearish market turn-around. Basically it says if the overall price differences for the last four down-days are larger than the than the last four prior up market days, then the bears have over-powered the bulls and the market is in the process of a turn-around. For this to take effect, the S&P would have to drop to 776 today, which doesn't look promising. Therefore, we are not getting final confirmation of an intermediate trend bear market turn-around. Though the indicators suggest we need a siginficant market turn-around to correct the extreme over-bought conditions, we do not have a full confirmation of this turn-around. The bulls look strong today and this turn-around could in fact be a minor market correction on its way back up. Though unlikely and extraordinary, it cannot yet be ruled out.
I don't know where the market is going today. It could keep on rallying or come back down. Right now, the trend is up. I will have more thoughts as the day progresses.
2:20 PM EST Update
Using the 2-2 rule as explained above, if the S&P moves above 829 today, then it would indicate a bullish market turn-up. Assuming the S&P hits 829 today, then the last two up days (including today) must rise above the high of the prior two down days. The S&P is at about 810 as I write so the market would have to stage a large rally from here to make this happen, but it isn't impossible. Reaching 829 would not mark the end of this correction, but it would mean the correction is being delayed. A rally above 875 would mark the end of this correction and the intermediate bull market has resumed.
Another way of viewing this rally is as a retest of yesterday's high price. If the S&P fails to move higher than 810±, then the this casts a bearish tone to the market.
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