First, those familiar with technical analysis know that the Dow's rebound to a loss of 180 points to a level of about 11,233, up from a loss of more than 300 points, could be just short-covering.
Second, major unknowns exist regarding the financial system. And I mean major.
The fate of American Interational Group (NYSE: AIG) remains an enormous question mark. The largest insurer of assets, AIG may face a downgrade that would trigger a collateral call from debt investors who bought credit default swaps, a form of insurance for bonds. Further, if hedge and other institutional investors sense those swaps are not in force, they may seek swaps elsewhere and/or sell assets to reduce market risk / raise capital. That could spark a new round of stock selling. AIG's shares fell $5.33 to $6.81 in late Monday morning trading.
Moreover, there's no consensus regarding whether the U.S. Federal Reserve would intervene to support AIG, if its business model becomes severely stressed. Does AIG meet the Fed's 'too big to fail, too interconnected to fail' standard? Point: A Fed intervention / non-intervention would create two dramatically different investing environments.
Finally, the U.S.'s economic fundamentals remain weak. Even if the market weathers the current financial storms -- to say nothing of further, as-yet unknown, hiccups in the financial / banking sector -- the U.S.'s economic fundamentals remain non-growth-oriented. Market bears ask: how can the market rise, long-term, if more people are joining the unemployment ranks each month? That would imply more mortgage defaults. It's a pretty strong argument for, at minimum, sluggish stock market conditions, for the immediate quarter ahead, at least.
Market Analysis: Caution is advised. One always defers to the judgment of professional / experienced traders, but unless you fit that bill, given the number of unknowns in this market I'd stand aside until the dust settles.
Source : blogginstock
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