US Stock Market: Sharp, Short-Lived Plunge Could Occur

Amid general optimism that the US government’s billion dollar bank bailout plan and almost billion dollar economic stimulus plan will help mend the financial ails of America, the CEOs of eight major banks appeared all day Wednesday before the House Finance Committee to discuss accountability for the TARP, Troubled Asset Relief Program.

Political junkies are overdosing, while traders are trying to sift through the media’s presentation of what really is going down in Washington this week.

The DJIA (^DJI) (+50.65 +0.64% to 7939.53), S&P 500 (^GSPC) (+6.58 +0.80% to 833.74) and NASDAQ Composite (^IXIC) (+5.77 +0.38% to 1530.50) closed the session with a modest gain. But markets are in disarray.

Crude Oil ($WTIC) has such a large gap between the March and April futures contracts of West Texas Intermediate and with the same month European Brent that I can no longer offer legitimate information here. This market is now under the direct control of bankers and is, in a word, a sham. I would not touch it with your ten-foot pole.

I will try to return to this report later in the day to fill in the data, for archival purposes; however, my personal time for blogging is absolutely minimal this morning, and for the previous couple days.

Traders nervously monitored the range bound action, that in the end went nowhere, ending mixed as the Transports, the Nasdaq, and crude oil sold off, while treasuries, the S&P, and banks were bid higher.

The technology sector was under pressure from the opening bell as institutional favorite Research in Motion (RIMM) (RIMM -14.5%) was crushed after announcing lowered guidance. The stock had a big run from the December low of 35.09, advancing +71% to a high of 60.47 earlier this week. This stock should be a good tell for the rest of the tech sector, today testing and briefly piercing the 50- and 89-day moving averages before closing above both of them.

The real story of the day was the precious metals market as both gold (GLD) (GLD + 2.32%) and silver (SLV) (SLV +2.85%) surged higher, accompanied by large moves in equities Barrick Corp (ABX) (ABX +3.91%), Goldcorp (GG) (GG + 6.34%), Newmont (NEM) (NEM +7.62%), Pan American Silver Corp (PAAS) (PAAS +8.54%), Silver Wheaton (SLW) (SLW + 14.1%), and Yamana Gold (AUY) (AUY + 8.97%). It seems the central banks are losing their grip on the metals market, unable to keep a lid on spot prices, and investors, sensing an opportunity, are beginning to purchase gold and silver stocks to leverage returns. We remain bullish on this sector, believing an acceleration to the upside could happen at any time, as traders realize the monetary implications of reckless spending, opting to hold real money rather than fiat currencies.

The crude oil market is at a critical juncture having returned to the level of the August 2004 break out. Many projects will have to be scrapped, economically unfeasible with spot prices this low, so supply will naturally contract, eventually resulting in a firmer price. We believe prices at these levels offer excellent value, and will continue to write puts as a way to accumulate long positions at these advantageous prices.

The market has its own internal clock so traders must be patient and wait for clues to alert them the real move will commence. We anticipate the broad market will eventually move higher, but are mindful a sharp, short lived plunge could occur to shake out weak hands. The next move above 855 in the S&P should be the real McCoy.

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