ZachStocks

As Fannie Mae (FNM) and Freddie Mac (FRE) appear to be dodging insolvency, the market may be at a key inflection point.  Looking at the market over the last 48 hours we have seen what could be an important medium-term swing in the overall equity indices.  The catalyst for this particular turn is actually the bad news surrounding Fannie and Freddie as investors likely capitulated at the beginning of the weak and sold out of remaining positions they saw as having substantial risk.  A wash-out type trade like this often creates an environment where every possible seller has finally exhausted himself and the only people left in the market are buyers.

For an example of this, look back to mid-March when Bear Stearns imploded.  During this time investors turned out good positions along with the bad with the general “get me out!” kind of attitude.  The resulting market environment turned out to be very good in the short run as the markets put on a good eight week show of rising prices.  The same could be happening right now.

I recently came across two helpful videos that may be of use when looking at general trends in the commodities markets such as Oil and Gold.  The link to the Oil video is here, and you can find the one to the gold discussion here.  As markets such as Oil and Gold reverse their trends, it is having a similar but inverse affect on the equity markets.  While the trend may be short-lived, I expect that we will have several weeks with positive trading dynamics and as such I am reducing my short exposure and looking for select areas to re-employ capital from the long side.

One of the benefits of a more constructive market is the liquidity offered to companies who need to raise capital.  Whether companies who currently trade on the exchanges are selling stock to shore up their balance sheets, or new entrants are pricing their IPOs, there will likely be much more activity over the next several weeks.  This has already been seen this week with the successful pricing of several deals such as MSCI Inc. (MXB), Energy Transfer Partners, L.P. (ETP), and Vale (ADR) (RIO) (among others).  The calendar for next week is already filling out with a few attractive names including GT Solar International, Inc. (SOLR).

So while playing the market cautiously has been a good benefit over the last 3 months, it may not be time to play offense and begin to build long positions.  Please be careful with exposure and use stops to keep the risk profile low, but at the same time understand that rallies during bear markets can be some of the most profitable.  It doesn’t take much capital in play to make some stable, attractive returns.

Wishing you every trading success,  Zach