Good Evening: While many investors felt stressed yesterday about the upcoming release of our government’s attempts to test bank balance sheets under various economic scenarios, today appeared to be an official attempt to mollify those worries. And it worked — somewhat. Treasury Secretary Geithner and Fed Vice Chair Kohn offered enough soothing words that our capital markets took back between 10% and 50% of yesterday’s moves. Watching each market retrace portions of Monday’s gyrations in almost lockstep fashion looked very much like the “countertrend Tuesday” moves I first learned about more than 20 years ago.
While the economic calendar was free of actionable data today, there were plenty of earnings reports for market participants to sift through. CAT, MRK, BK, TXN, and IBM were the headline grabbers overnight and this morning, and the general theme was one of disappointment. The subplot, however, called for all these names to open lower and then recover some or all of those early downticks (except for TXN, which did the exact opposite). The rest of the tape responded in kind. After a lower open, equities spent most of the day grinding higher.
Also providing a tailwind, at least to the financial stocks, were a couple of speeches made by Timothy Geithner and Donald Kohn. Testifying before a congressional oversight panel this morning, our Treasury Secretary sought to placate investors that were yesterday chewing their nails about the now infamous bank “stress tests”:
“In a prepared statement for the hearing in Washington, Geithner said ‘the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.’” (source: Bloomberg article below).
Though his successor offered an eerily similar endorsement for both Freddie and Fannie just prior to when the GSEs became wards of the State, most market participants took Mr. Geithner’s statement as a vote of confidence in our banking system. But I see this whole exercise as one morphing from a well intentioned peek under the hood of the banking system into one that resembles little more than CYA politics. Highly regarded bank analyst, Meredith Whitney, echoed similar sentiments on Bloomberg T.V.(see below). She feels the stress test will be far harder on the regional banks than on the money center institutions everyone is fretting about. The timing and methodologies (about which you can read below) have changed so often that this “test” is likely to show whatever Treasury deems most expedient. Benjamin Disraeli once quipped, “There are three kind of lies: lies, damned lies, and statistics”. I’m guessing we’ll safely be able to add the results of Treasury’s stress test to the former British Prime Minister’s famous list.
If Mr. Geithner’s testimony wasn’t enough to talk folks off of the ledge they wandered on to yesterday, Fed Vice Chairman, Don Kohn, chipped in with some federally sponsored advice of his own during a speech today. Mr. Kohn surmised that our economy was on the verge of a stabilization that could lead to an economic recovery in the second half of this year. Mr. Kohn’s forecasts have been wrong just as often as were those of his mentor, Alan Greenspan, but some investors actually tried to take him at his word and displayed some hope today.
Stocks opened down less than stock index futures had suggested they might. Churning around the unchanged mark until Mr. Geithner’s testimony hit the tape, equities spent the rest of the day in an uneven climb. By day’s end, the major averages had recouped almost exactly half of yesterday’s losses, with the Dow (+1.6%) lagging, and the Russell 2000 (+3.9%) leading the way. Even the bank stock index (BKX) followed the script by rising 8% in the wake of Monday’s 15% tumble. Treasurys also reversed course by dropping this afternoon. Yields rose 2 to 6 basis points as the coupon curve steepened. The dollar joined in, though it only edged lower, while commodities made it a clean sweep of reversals by rising today. Both the grain and energy complexes recorded gains, and the precious metals kept up their end of the bargain with a late day sinking spell. The CRB index rose 0.6%
I learned many things while working with CNBC’s Rick Santelli at the Chicago Board of Trade in the 1980s. He used technical analysis to help guide his views back then, and he was an early devotee of both Gann and Fibonacci. Constantly in search of patterns, he was the first to point out to me the concept of “countertrend Tuesday”. Though I don’t know if Rick invented the concept or not, he did notice that markets tended to forcefully trade in the direction of the underlying trend on Monday’s and Fridays. Wednesdays and Thursdays were less strongly correlated with the main directional trend, in his opinion, but Tuesdays were different. Tuesdays seemed to trade in the opposite direction of the main trend, and often with less force and less volume.
Santelli dubbed them, “countertrend Tuesdays” and I’ve rarely seen a better example of his theory at work than what the markets served up today. Each asset class on Tuesday moved in the opposite direction of the strong action posted Monday, as both magnitude (percentage move in price) and force (volume) backed off as they should. Since all these markets don’t always move in such perfect harmony, to which of them (stocks, bonds, currencies, commodities) do we turn to when trying to spy the main trend? It’s a bit of trick question, since it’s really risk appetites that are the driving force in our capital markets.
The urge to take on risky assets, ever more prevalent between 2003 and 2007, has been in a downtrend for 18 months now. Until Monday, those risk appetites were starting to grow after reaching the point of near starvation six weeks ago. The question before investors this evening is whether or not today’s “countertrend Tuesday” action is a tip off that the main trend to flee risk has resumed. It looks to me like risk aversion is about to reassert itself, but the next few days should give us more clues as to whether Monday or Tuesday was the real head fake.
– Jack McHugh
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