RISE IN 3-MONTH T-BILL RATE AND DROP IN LIBOR SUGGEST CREDIT FREEZE IS THAWING -- THAT INCREASES THE ODDS FOR A STOCK MARKET BOUNCE

T-BILLS SHOW MORE CONFIDENCE ... One of the side-effects of the market meltdown since early September has been the sharp drop in the 3-month T-bill rate. Chart 1 shows the 3-month rate falling to zero over the last month as scared investors flocked to the safety of T-bills. [T-bill rates fall when investors buy bills and rise when they sell them as they're doing now]. Things have improved over the last week, however as the chart shows the IRX trading back over 1% for the first time in a month. That means that investors are starting to sell T-bills which is a sign that the recent panic may be easing. Since bond prices have been dropping, it appears that some of the money coming out of bills may be finding its way back into stocks. Chart 1 shows that stocks (green line) and T-bills have fallen together since September. Chart 2 shows that the last T-bill bottom in March corresponded to the last bounce in the S&P 500 (green line). Another sign that the recent credit freeze is thawing is the drop in the Libor rate.

Chart 1

Chart 2

LIBOR RATE IS DROPPING... You've no doubt been hearing a lot about the Libor rate lately. Libor stands for the London interbank offered rate and measures what banks charge each other for 3-month loans. Over the last month, the Libor rate soared as banks refused to lend to anybody and the credit system threatened to freeze up (Chart 3). Thanks to the aggressive actions of global central bankers over the last week, however, the Libor has started to drop. The box and red arrow in Chart 6 shows today's 36 basis point drop to 4.06% and represents the biggest drop in nine months. Put together with the rise in 3-month T-bill rate, that should be taken as a positive sign. It may also increase the odds for a stock market bounce from current oversold levels.

Chart 3

OVERSOLD MARKET DUE FOR A BOUNCE ... Chart 4 shows the 14-day RSI rising from oversold territory below 30 for the first time since July. That increases the odds for a rally attempt. The hourly bars in Chart 5 show the S&P trading between its hourly Bollinger bands. Initial overhead resistance sits at last week's intra-day high at 1044. The S&P needs to clear that barrier to confirm a short-term bottom. Meanwhile, the VIX Index is pulling back from a short-term overbought condition (Chart 6). Initial VIX support rests near last week's intra-day low at 46.35 (Chart 7).

Chart 4

Chart 5

Chart 6

Chart 7