Bearish Justice

This week brings a lot of potentially market-moving economic news as well as a regular Federal Reserve policy meeting. Treasury yields have fallen back from recent peaks, but the benchmark 10-Year Note remains above 5%. The rally in government bonds may have something to do with ongoing nervousness about mortgage-related securities and the downturn in home sales. Hedge funds and other large bond investors, fleeing from credit risk, are apparently buying Treasuries by the truckload.

Wall Street titan Bear Stearns (BSC) is being forced to commit billions to bail out two hedge funds that are filled with complex and illiquid interest-rate derivatives, following the refusal of other major firms to assist in propping up the funds. There is a bit of poetic justice in this. In the 1998 Long Term Capital Management crisis, Bear Stearns was the only major dealer that refused to join the hastily-arranged consortium that headed off a bigger meltdown. Now some of those same firms are letting Bear clean up its own mess. Even on Wall Street, what goes around comes around.

The stock market today traced a near-perfect parabola, reaching a mid-morning apogee before dropping into the close. On Friday, the S&P 500 closed below its 50-day moving average for the first time since early February and fell further today. If key support near the June 8th low of 1487 fails to hold, much bigger declines could be in store. Our best guess is that a rally will begin as soon as the Bear Stearns mess is resolved, but it is unclear how soon that will happen.

The energy sector was down as crude oil prices retreated slightly, but is holding about short-term support and maintains its strong intermediate-term momentum. Technology remains strong, while utilities, health care, financials and real estate are still in in downtrends.