We had projected a moderate rally as the week began, based solely on subtly bullish signs that were noticeable in the S&P's intraday charts. Alas, it was not to be, and the mini-S&P futures were unable, even, to push above Friday's relatively subdued highs. Granted, the big news of the day was not exactly upbeat, since it concerned rating cuts for Lehman, Merrill Lynch and Morgan Stanley by the newly religious Standard & Poor's. But when was the last time bad news kept the stock market from rallying? For months, bad news has been treated on Wall Street as good news, based on the not implausible notion that it would scare the banks into putting their respective houses in order. At least, that was the theory of it. In practice, however, regaining stability might require the banks to do quite a bit more than they have done already. Remember, the banking system is not merely illiquid, as Paulson, Bernanke et al. would have us believe; rather, it is insolvent, with risk exposure that still greatly exceeds the total capitalization of all the banks put together. The charts of the bank stocks themselves belie the notion that the worst is past. Over the weekend, we sent subscribers a dozen or so such charts, many with price targets so far below current levels as raise the question of whether some of them will even survive. Goldman, General Electric, Bank of America and Deutsche Bank evidently will, at least according to our technical runes, since their respective bear market targets sit well above the zero axis. But possibly not Citigroup, Fannie Mae, Merrill Lynch, Lehman and UBS, all of which appear headed toward salvage value. We could be wrong, of course. It occasionally happens that a stock seemingly headed for oblivion reverses unexpectedly
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