Stock/Bond Swaps Accelerate Rally

January 25, 2008
Kevin Haggerty

Kevin Haggerty is a
full-time professional trader who was head of trading for Fidelity Capital
Markets for seven years. Would you like Kevin to alert you of opportunities in
stocks, the SPYs, QQQQs (and more) for the next day’s trading?

Click here for a free one-week trial to Kevin Haggerty’s Professional
Trading Service or call 888-484-8220 ext. 1.

The SPX hit the anticipated 1268 key price and time zone (.382 RT 1576-769)
this week, with the 1274.29 low on Monday, and then a marginal new low on
Wednesday at 1270.05, which was not confirmed by either the RSP (SPX Equal
Weighted Index) or the $INDU. The SPX decline was extended beyond the 1-year
-3.0 Standard Deviation band, and the percentage of SPX stocks above their 50
and 200-day ema’s has reached an extreme, at only 7.4% above the 50-day ema, and
only 14.8% above the 200-day ema. The RSP has declined -25.5% high to low from
its 7/13/07 52.74 high to the 39.30 low on Monday. The RSP had failed to confirm
the SPX new cycle high at 1576 on 10/11/07, due to the extension in price of
energy and basic material stocks, which were the last leaders standing.

The SPX extended decline to the 1268 zone made stocks cheap relative to
bonds, and this generated significant swaps. You can see on the charts how this
helped accelerate the SPX off the lows this week, as the SPX and TLT were mirror
images. Congress, the Fed and the Administration panicked, so there was a rush
to a stimulus package of sorts, with the 75 basis point cut in the Fed Funds
rate. Financials made a vertical move the past 3 days, with stocks like MS and
JPM advancing +22.5% low to high. There were some potential bond insurer bailout
news, and this really accelerated the financials, as the shorts were carried out
of the “Casino,” as the Generals squeezed them big time, picking a bottom in the
financials for the third time, with the $BKX in a -38% decline from the 2/07
high.

The decline of 25.4% and 19.4% for the SPX Equal Weighted and Cap Weighted
Indexes is similar in price and time to the 1990 decline of -20.3% and 1998
-22.5%. The 1994 was only -10.4%, while the 1987 crash was -36%, and the big one
was of course the 31 month SPX -50.5% decline from the 3/24/00 1553 top to 769
10/10/2 low. The jury remains out for the extent of this bear market, as a 2-day
vertical spike from an extended key price and time zone, accelerated by news and
short covering, is hardly a reason to say we have seen the bottom yet. Rallies
are always sharp in bear markets, and this is just the first one from an
extended zone, so we will see a retest of the 1270.05 low at the least. The SPX
is +6.7% from 1270.05 to 1355.15 in a day and a half, and the SPX futures are
+9.20 points as I complete this at 7:45 AM ET, so the initial resistance in play
is 1364-1371, then 1384-1386. Daytraders who played the index long reversals
from the key price zone Tuesday and Wednesday are happy traders. There was a
switch to the short side yesterday on the opening Trap Door, on the 10:00 AM
1353.24 high, which declined to 1334.31. It rallied back to the 1352.07 close,
so a continued advance today and next week puts traders on the short side once
again.