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Saturday, October 4, 2008

Bailout Bill Stocks Limp: How Could that Be? The reason why stocks sold off after bill passage is technical

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We are reading articles on many websites, and newspapers that seem to completely not understand how markets work. An example of such articles are below.

Here is the correct analysis and the mistake these analysts and writers are making.

Recall that before the annoucement of the bill passage we called the top of the day here on this blog (read previous post). The market was going to sell off no matter what the outcome of the bill vote would have been.

The reason of the sell off is technical. How come: The move that took place after the bailout bill passge is normal, as the market was in the area of sellers and had to go down to search for the buyers.

It has been doing this since the Monday bottom. We have been using this observation to time this market since Monday end of day, and we have been right in timing each and every daily top and bottom area since Monday. The regular reader knows this as he has been following the release of market calls in real-time on this blog.

For instance we issued a call to buy the bottom of Thursday, and to sell the top of today (Friday).

PS: the analysis in Minyanville article is wrong. The prove will come this coming week when the market will rise, but they would come up with another explanation which would also be wrong. The real reason is rooted in supply and demand for stock. That is it. Know where demand is, and where supply is, and you know how market will be behave.

Excerpts from an article by a professor on Minyanville:

"How can this be? How can the passage of the Bailout Bill find stocks limping awkwardly into the close? Wasn't this supposed to be our finest hour? The desperate resolution to the year-long crisis? Well, the reality we have tried to reveal here in Minyanville is that the Bailout simply will not work.

The credit markets have spoken. And they are saying - no, they have been saying all along - that the $700 billion Bailout Bill is nothing but a gnat attacking a buffalo. There has been an ongoing disconnect between stocks and credit markets for months now and even the action on Monday did little to correct it.

There is only one thing necessary to understanding what is happening and it is this: no one at U.S. Banks, no one at the Federal Reserve and no one in politics can accept the reality that real estate assets in this country remain oversupplied, overpriced and overleveraged."

"It is that simple." (This is wrong analysis and conclusion).

"TAF, TSLF, SuperSIV, TARP, none of that matters. No matter what acronym is created to disguise the fact that assets are overpriced, or what government intervention is created to prop up those asset prices, the market will inevitably overpower it. This time is not different. In fact, it is continuing to play out almost exactly as the Great Depression did. The bottom line is that despite the bailout, risk in owning stocks has increased, not decreased."

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