What a difference a day makes! On Monday the equity market resembled the cartoon character that has run out of road at the edge of a steep cliff, looked down but not quite plunged. It may well be that Chairman Bernanke had a sleepless night on Monday as rumors that blue chip Wall Street firms were on the verge of liquidity implosions. So the chairman does what he does best which is to ensure that even more paper money is now in circulation.

There is a tragic irony in the fact that on a day when the trade deficit surged, highlighting the fact that countries like China are amassing mountains of dollar denominated paper for their manufactured goods, the Fed demonstrates its extraordinary powers of Alchemy. It is uniquely positioned to create more dollars - America's leading export - by ramping up the money supply, allowing the ailing financial sector to swap their dodgy paper for Treasuries, and therefore ensuring that even more purchasing power can be "recycled" for Chinese manufacturers and oil based sovereign wealth funds.

The charts tell the story better than any clever turn of phrase. The Federal Reserve had to act yesterday and everybody knows it.

It would not be surprising to see the S&P 500 (^SPC) make relatively easy progress towards 1370, but breaking the downward trendline and sustaining closes above 1380 will, I suspect, be a real stretch.



I would be much happier this morning if I could take some comfort from the fact that we got the rally in the financials that I anticipated in Monday's commentary, and that it was for the suggested reason. To reiterate, I said that - "If we do get a rally in the financials, which I suspect is imminent, it will certainly take the whole market up rapidly as we saw last August." But I also suggested that it would have arisen because the "smart money" would have been tempted "as in previous crises, to buy on the bullets, or in the current scenario, buy when all of the weekend news reports are full of gloom and doom about a financial Armageddon."

We got the rally but only because the central bankers have lost their nerve and recognized that certain institutions literally are too big to fail. We are now faced with a crucial and insidious doubt which is that the world's central bankers really are scared of a financial Armageddon and will throw everything they can, including the kitchen sink, at trying to prevent a finacial meltdown. If they succeed, then careless bankers will have been rescued yet again and the man on the street will be saved from some dire consequences. If they fail...I think it's better not to go there.



The broker/dealers (^XBD) were hard done by yesterday's rally and "only" managed a 7.3% rally unlike the mainstream banks, some of which were double digit beneficiaries. I am sure that I cannot be alone in feeling quite uncomfortable when one sees financial stocks behaving like the dot com stocks at the end of the 90's.



Here is what appeared in Monday's commentary - "Annaly Capital Management (NLY) which is one of many highly volatile financial intermediaries that should be expected to move abruptly again this week. If a short covering rally is triggered from buying amongst the banks and financials this stock will cover a lot of ground very rapidly." I would salute you for your fortitude if you decided to go long during Monday's trading.



Despite the massive rescue operation that was mounted yesterday Bear Stearns (BSC) still behaved poorly and looks very wobbly. The fact that it could barely manage to close higher and probed new multi-year lows during the session suggests that the liquidity concerns are founded on more than opportunistic rumors placed by short sellers.



The chart for Wachovia Bank (WB), which surged more than 13% yesterday poignantly illustrates the timeliness of the Fed's reflation play. The ride up to the 50-day EMA should be effortless but whether the downward trendline will be broken is much more problematic.



EOG Resources (EOG), mentioned in Monday's column. moved up from pennant/bull flag pattern and registered an almost seven percent gain.



Salesforce (CRM) also has a bull flag formation with all of the right volume characteristics and could be ready for an attempt to regain the levels from mid-December.



Clive Corcoran is the publisher of TradeWithForm.com, which provides daily analysis and commentary on the US stock market. He specializes in market neutral investing and and is currently working on a book about the benefits of trading with long/short strategies, which is scheduled for publication later this year.

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