Wednesday market update

Unless the Fed has another trillion dollar package up their sleeve the stock market is now starting to look ahead and evidently the idea of another big surge in the unemployment rate next week and rotten corporate earnings to be announced in early April is still an issue.

We all hope these many bail out programs help, but it doesn’t change what is happening now or about to happen in the next quarter or two. The direction of corporate earnings is down and even with these grandiose plans it is just simply not going to make a difference in this quarter or the next. Earnings are in free fall and until we see some signs that the economy is reviving, it is extremely dangerous to get sucked into these bear market rallies.

You have to understand the powers that be will do everything they can to entice you to buy, to play on your greed and to make you feel that if you don’t move now you’re a fool. Make no mistake, the media and their constant barrage of so-called bottom experts are all part of this game.

I want to explain a few things about how the markets work that are worth discussing right now.

I want to set the stage by asking an important question first.

In February to early March, when the DJIA fell 1,491 points who was taking the other side of these trades? For every sell to occur, someone has to be a buyer and if most are selling who is it that ends up owning all of these shares of stock?

To answer this question, we need to understand who the Specialists are on the NYSE and who Market Makers are on the OTC.

A specialist is a member of an exchange who acts as the market maker to facilitate the trading of a given stock. Market makers are investment firms who trade electronically, rather than on the floor of the exchange.

The specialist holds an inventory of the stock. They post the bid and ask prices, manage limit orders and execute trades. Specialists are also responsible for managing large movements by trading out of their own inventory.

If there is a large shift in demand on the buy or sell side, the specialist will step in and sell out of their inventory to meet the demand until the gap has been narrowed.

However, what happens when the Specialist or the market maker runs out of money to meet all of the demands of the sellers? They have to borrow money to meet this need and that is where the Federal Reserve comes into play. They provide the capital in extreme situations.

We have just seen one of the biggest sell offs in the stock market history. The S&P 500 index (1,586) fell from its highs in 2007 to its lows this month (665), a loss of 921 points, or 58%.

It is essentially the Federal Reserve who is loaded up to their eye balls in stocks of corporate America and it is in their best interest to change that and get you to take that stock on a “buy”.

Now let’s shift our attention two weeks ago, when the market had taken out the November lows and everyone was piling into the short side of the market.

The Federal Reserve had to pull out some powerful guns to stop this selling and induce a massive short covering squeeze. First they floated talk about removing the Mark to the Market idea, which sent the financial shares higher.

More talk of implementing the uptick rule to squeeze the shorts.

Then to follow up, the big guns were announced with Bernanke’s trillion dollar plan and Geithner’s trillion dollar toxic assets program, timed for maximum effect on the stock market.

We see Geithner writing opinion pieces for the Wall Street Journal in an attempt to attract investors back to the markets. They want you to take the risk instead of them.

It is the Fed’s job to get the markets moving again and to restore confidence, but in the end, you must decide if the reward is worth the risk in this quarter, in the next quarter and the future because the Fed doesn’t care squat about whether you make or lose money – or whether they tell you the truth or not.

This is how the game is played and the media have a big role in it. If you haven’t learned this lesson by now, you need a reality check.

Let’s talk about the technicals and what they are telling us.

After breaking above the 50-day moving averages, selling was invoked today. It is not about breaking above this resistance. It is about staying above this key resistance level in a bear market and for over a year we have not seen prices remain above this average beyond two or three days – that’s about it.

I thought it was very interesting that despite yesterday huge move, volume actually declined for the Wilshire 5000.

I still think the market is short-term overbought and due for a correction. The daily stochastics for the S&P 500 turned negative today with %K at 92 and %D at 92 and given the news ahead I think we will at a minimum retest the daily middle Bollinger Band line, which is at 743.

What happens after that is very much dependent on how investors feel about the first quarter earnings.

Remain defensive.