Monday, July 21, 2008

Banks lose Money, Markets are up, what's next ?

CitiBank & Bank of America lost less money than estimates leading to a smart rally in the Asian markets - yes - you read this right, the results caused Asian markets to move up sharply, while the US markets remained almost unchanged.
How much more can Asia rally on the back of a 'thank god the American banks are not yet bankrupt' euphoria ?
I suspect the answers will be - not much. We will probably find this out in the next few days.
Bear markets see sharp and sudden rallies which fizzle out quickly. This is what seems to be happening in the US markets after a two day rally, the markets now appear subdued.
In India, the banks have embarked on a huge rally of their own, no doubt encouraged by the big up move in Financials in the USA. The Bank Nifty has broken out of a small trading range today. This is significant since the broader market Index - the NSE50 remains inside a trading range, although it is at the top of the range.
Every breakout has two possibilites: First, it is the real thing, the breakout suggesting that a change in trend has taken place, with higher levels ahead. Second, it may be a false breakout, the last thrust where smart money sells out while the unsuspecting 'public' enters.
What is the nature of the breakout by the Bank index ? is it real or is it a false breakout ? Now, the only way to answer this question is to wait for a few days by which time the market will tell us the answer. The right question to ask is: Do I want to trade this breakout ? My answer will be, NO. If this is the real thing, a true change of trend, then there will be many opportunities to enter this move. The first pullback will be an opportunity. There is no need to rush. Inflation is at the highest in 13 years, interest rates are moving up, the economy is slowing down - hardly an environment for banks.