This Evening's Log Entry: Reminiscent of TARP

The Senate couldn’t come to terms on $2 trillion in fiscal stimulus this afternoon, and while that’ll be the media’s narrative for why futures opened limit down, they -- via the “betting markets” -- had been nearly there all weekend.

This is reminiscent of TARP (Troubled Asset-Backed Relief Program) back in the fall of 2008: The vote failed on 9/29, the market tanked ~8% that day. Then by 10/11 Congress changed its mind and the rest of the world joined in with massive stimulus as well. The market then screamed higher to the tune of a nearly 12% one-day rally.

Here’s from an 10/13/08 CNN Money article:

“NEW YORK� (CNNMoney.com) -- Stocks rallied Monday afternoon, with the Dow rallying 976 points during the session, as investors bet that the worst of the credit crisis is over, following a series of global initiatives announced over the last few days.”

“The Standard & Poor's 500 (SPX) index added 104 points, its best one-day point gain ever, equal to 11.6%.That was also the best percentage gain since Sept. 1932 and the fourth-best overall.”

“Stocks were buoyant Monday as investors welcomed a global effort to unfreeze the credit market and get money flowing through the system again. Although stocks reacted positively, credit markets barely budged.”

“"We had some good news this morning from the Fed and the other central banks, but we were also oversold on an historic level and due for a big bounce," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research.”

“Last week was the Dow's worst ever, ending a stunning eight-session selloff that seared 2,400 points off the blue-chip indicator. That represented a 22% decline in the Dow, something not seen since at least the '30s.”

Yes, no doubt, Congress will once again come to terms within days, if not hours, on a massive fiscal package -- and I suspect it too will be accompanied by a strong equity market rally. 

Said rally could get some support from portfolio rebalancing (balanced funds moving back to their equity targets) over the next week as we approach end of quarter.

The sustainability of the rally will be the question. I suspect, at best, it’ll get us past this initial panicky phase where heavily leveraged positions, etc., are unwound.

However, before we begin to settle into more orderly bear market action, I think the dollar’s going to have to stabilize, and come in a bit.

I’ll also be watching gold and treasuries closely for signs that the forced liquidation there has abated as well.