Thanks to an article by Richard Whalen, I was reminded that today is the 5th anniversary of the Federal Reserve launching an emergency 50 basis point rate cut in response to Countrywide Financial’s inability to roll its commercial paper.
This was the first canary in the coal mine to drop dead in advance of the worst recession and housing collapse in 80 years.
In honor of this auspicious anniversary, I’ve decided to do something a little different with the blog in the upcoming weeks. You see, we all have crystal clear hindsight regarding the financial meltdown, but what was the prevailing mindset in the weeks leading up to the disaster?
To answer that question, each week I will be posting Minyanville’s “Week in Review” from the appropriate week in 2007. The first such post follows. A word of warning, however… There are some eerily similar “whistling through the graveyard” comments in these posts. To wit, note how good durable goods and new home sales numbers were holding the market up on August 24, 2007. Yep. New home sales.
After the late summer’s wild ride, markets stabilized this week as the VIX dropped 25%. The SPX was able to retake its 200 day moving average as renewed takeover chatter resurfaced mid week while the DJIA retraced over 50% of its losses. Despite a sluggish Thursday after Countrywide’s (CFC) CEO dropped the “r word” investors’ jitters were eased after Friday’s upbeat durables and improved new home sales report.
With a lot of traders away from their desks next week before the Labor Day weekend, markets should be fairly range bound. It’s similar to a heavyweight fight… after several rounds of delivering heavy blows the Bulls and the Bears are now in the middle of the ring leaning on each other trying to catch their collective breath. When traders return to their desk post holiday, the battle will continue. With the damage done to the financial complex and the latest bounce coming on light volume, probabilities lie in retesting the August lows. For the Bears to gain the upper hand they must crack SPX 1375 and consequently cause the VIX to explode and the BKX to fall out of bed. Bulls need to hold above 1425 to change the psychology of the tape before moving higher and forcing the shorts to cover. Minyans it is important to remember during these volatile times… nobody likes a draw.