I was going to write on the bull markets of Crude Oil, Soybeans and Gold today; but I have decided to follow-up on the IndyMac failure and use it as an example in scenario creation. The link below leads to the video with the example. Below that are a number of observations on the IndyMac story.

http://www.tradingsuccess.com/video/blog-071308/indy.html

OBSERVATIONS:

  1. The IndyMac stock price had dropped from a high of US$45.46 on May 5 2006 to Friday’s open of US$0.21. It closed at US$0.28 and after the story broke, the market is said to have dropped to US$0.03. The fact that the stock price had dropped to below US$1.00 on Friday’s open illustrates that IndyMac’s troubles were well known.
  2. That being the case, you could argue we may not see a reaction. But I don’t see it that way. Indy is a large bank and its failure is another hot coal in the fire of the troubled US financials. Following on the heels of Freddy and Fannie, it will lead to an adverse effect on the US Stock Market.
  3. I looked at equivalent bank failures from 1966 to the present and 1900 to 1926. There were 8 in all. All had a similar effect of :
  • leading to at least a 4% to 5% rally and
  • On the day after the news hit the market, whether or not that day had a down close, we saw an up close in the Dow Jones. So, if the pattern is to repeat, then Tuesday should be an up close.
  • A sample of ‘8′ is not large enough to be robust but it does provide some data to create preliminary scenarios, scenarios that will be confirmed or rejected by the price on Monday after 9:30 am EST.

07-13-2008-indymac-m.jpg
FIGURE 1 IndyMac Monthly Chart

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