ALERT: Bear Stearns Plunges 50% Today

Mar 14, 2008: 9:12 AM CST

Bear Stearns (BSC), one of the major US Financial companies, lost half its value intraday today on concerns that the Fed’s recent liquidity injection “might not work” for the company.

Instantly, the Federal Reserve voted unanimously today to provide cash to help this crisis, and stands ready to inject more as needed.

As reported by Yahoo News, the Federal Reserve issued a two-sentence statement, part of which said, “The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system.”

According to Yahoo, “The plan will provide secured funding to Bear Stearns for an initial period of 28 days, seeking to provide short-term relief for Bear Stearns.”

Furthermore, “The action by the Fed board in Washington represented an endorsement of a rescue effort for Bear Stearns that had already been arranged by JPMorgan and the Federal Reserve’s New York regional bank, [which was] seen as a last-ditch effort to save the investment bank, which on Friday acknowledged its serious financial problems after a week of denials.”

With that news, let’s look at what happened to the stock prior to the news (or let’s see what caused this announcement to happen so quickly):

On to the massive decline in the weekly chart:

Before you start thinking this is a normal decline, realize how large Bear Stearns is to the US Financial markets, and what this might mean for the broader sector.

This is an extremely important development, which shows that investors must always be on guard for catastrophic events (news/fundamentals) in their chosen investment, and also highlights that even long-term investors should use some sort of position liquidation plan (such as an 8% or 10% arbitrary stop-loss, or some other risk control management plan).

At any moment, the unthinkable can happen in the market.

4 Comments

4 Responses to “ALERT: Bear Stearns Plunges 50% Today”

  1. bear stearns Says:

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  2. bear stearns stock Says:

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  3. NTH Says:

    Hi again,

    Yes, news on BSC and other stocks always have to be considered. BSC is a large company and it remains to be seen whether they will go the same way as Northern Rock have done in the UK. Its hard to believe that just a little over a year ago they were trading around 170 dollars. That is a substantial fall from grace. It remains to be seen just who will be next, and how many there will be. The financial sector is risky.

    > I wanted to post the amazing gap fade that took place earlier today

    The problem with many ‘fade the gap’ (or should they really be called ‘fill the gap’) trades is that they do not always come off, and are there any stats that they happen more than 50/50?

    good luck with your trades,

    NTH

  4. Corey Rosenbloom Says:

    NTH, Absolutely.

    At the start of 2007, Bear Stearns traded at $170. Amazing. I’m sure a lot of at-home traders tried to call the bottom in that stock and were hurt.

    To me, I consider the “fade the gap” trade to be a specific set-up with a specific strategy, rather than use the term ‘gap-fill’ which is more generic. There’s a difference and I try to highlight the difference when I can.

    I’ve been posting the monthly statistics for the DIA at the end of the month. Type in “Gap Stats” into my search on the blog to find January’s and February’s stats. I think it was that 70% of gaps filled in January and only about 55% did so in February.

    Corey