Monday, March 24, 2008

Was that the bottom?

I wrote on March 11th that I had thought we had hit bottom. On March 10th, the S&P established a double-bottom, and the market rallied off of that bottom on the 11th.

One week ago, the market did break through that bottom, as news of Bear Stearn's fire-sale bailout rocked the markets. However, markets recovered from that shock, and actually ended last week positively.

Today, the major indexes are up multiple percent on news of the higher-priced BSC buyout, CIT financing, better-than-expected home sales, and just good feelings. One can almost feel the fear slowly trickling out of the market - and if they don't want to go by feelings, the VIX, often called the "fear indicator" (but actually a measure of options volitility) has fallen from an intra-day high of 35 last Monday to 25 today.

Thankfully, the pathetic-performing financial in my portfolio have begun to pick up some lost ground - Countrywide has moved from $4/share last Monday to over $6 today. (As I love pointing out, Countrywide is in the process of being purchased by Bank of America - at this time, that deal would close at $7.80 based on BAC's share price). I added 30% more CFC at $4.44, and I sold off that block at $6.20 today. I'm holding the rest until the merger close or, at least, the arbitrage gap starts to narrow.

I also bought CIT at $9.90 in the pre-market today as I thought they'd announce good news about financial backing; they didn't even have to announce anything to be up about $3 today. I have an itch to sell now and take my nice daily gain, but I think I'll use my seemingly well-timed entry as a basis for a long-term investment. After all, CIT has fallen from about $60/share, and until recently, its business was not tainted by the subprime fiasco.

I missed out on Freddie and Fannie - I thought were good vehicles to play a housing/economic recovery because of slightly less danger due to their quasi-government status. Both were trading near (or below) $20 last Monday; both are above $30 today.

One of the most interesting aspects about this rally is the depth of companies participating in it. It may be short covering (which I never regard as a bad thing), but many general market laggards are performing, or even outperforming, the overall indexes as they rally. For example, Buffalo Wild Wings, a company that I regard as undervalued, continued to slide and suffer as the markets fell in January, February, and March. However, starting last Tuesday, BWLD reversed the trend, and share price has increased from $20 to $26 in the past four sessions. (Note: The increase is partly due to an analyst upgrade). Crocs and eBay, two more laggards, are both up 15% percent in the last week.

I'm not 100% certain that the market won't face pressure in the coming days, weeks, or months, but the combination of technicals (double bottom, higher lows), data (housing numbers, Fed opening discount window, BSC bailout) and mentality may just mean that the bottom is in.

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