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Daily Blog -02/23/09- 2:06 P.M.

Friday Afternoon Bounce is Dead

The U.S. market's Friday afternoon bounce is dead, long live the Friday afternoon bounce! Maybe the correct name should be Friday afternoon short covering. After a big down week last week successful shorts covered positions and took profits ahead of the weekend. Now that we're back to a new week the downtrend has resumed.

Asian markets were mixed on Monday. The Japanese market closed lower with the NIKKEI index off 0.5% following news that one of the country's biggest lenders SFCG Co. announced it was filing for bankruptcy. This bankruptcy news sent the NIKKEI plunging lower with the index trading near 7,200 before bouncing back to 7,376. Chinese markets fared better. The media is reporting that Chinese stocks were higher thanks to news that the U.S. government might take a 40% stake in ailing financial giant Citigroup (C). I fail to see the connection between Citigroup and rallies in the major Chinese exchanges but the Shanghai index was up 1.9% and the Hong Kong Hang Seng index closed up 3.7%.

European stocks did not respond as well. European banks also saw a temporary boost on the Citigroup news but the rally eventually faded and the major exchanges all closed lower. The French CAC 40 lost 0.8%. The British FTSE lost about 1% and the German DAX fell 1.9%.

The big story today is Citigroup. The Wall Street Journal is reporting that C and the U.S. government are in talks to have the government raise its ownership in the company to 40%. The positive spin on this was that Citigroup would not be 100% nationalized. The negative spin on this was how does this affect common equity shareholders? The U.S. government owns something like $45 billion in preferred shares of C. Yet the market cap of C is only about $11 or $12 billion. Is the U.S. going to convert all of their preferred into common for a 40% ownership stake? That would be a huge loss to the U.S. taxpayer. The problem is we don't know the details yet and these talks could break down.

Currently the U.S. market is in widespread decline. The only sectors showing any green today are housing stocks, airline stocks, banking stocks and the U.S. dollar. The DJUSHB home construction index is up 2.2%. The XAL airline index is up 2.2%. The BKX and BIX banking indices are up 0.4% and 1.7% respectively. The U.S. dollar ETF (UUP) is up 0.7%.

The rest of the market is off a very painful 1.5% to more than 3% for some sector indices. The Dow Jones Industrials are off 1.8% at 7,226 and hitting new multi-year lows. The NASDAQ composite is down 2.4% and painting a bearish engulfing candlestick pattern that looks poised to breakdown under round-number support at the 1,400 level. The S&P 500 index is off 2.2% and testing its November 2008 lows near support around 750.

Chart of DJIA:

Chart of the NASDAQ:

Chart of the S&P 500:

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