New All-Time Lows For Freddie Mac and Fannie Mae

Aug 20, 2008: 11:21 AM CST

Mortgage backers Freddie Mac (FRE) and Fannie Mae (FNM) made new lows today, after erasing all gains made from the July ‘Savior Rally” that was widely expected to be the absolute bottom for these stocks.  Let’s look at where we are price-wise and how far these stocks have fallen recently.

First, their daily charts:

Fannie Mae (FNM):

Freddie Mac (FRE):

I’ll discuss these charts together, as their price patterns are extremely similar (only their prices are not).

Price consolidated (flat trend) throughout April until June, when price began a slow ebb to the downside that turned into a vicious snowball effect move washing out investors to the downside until the eventual July 15th bottom when virtually everyone was most pessimistic about these companies (myself included) but then a massive, triple digit percentage surge occurred and almost 400 million shares changed hands in both companies.

Both stocks gained over 100% from their respective bottoms, rewarding those almost instantly who grabbed the falling knife and reassuring us all that these stocks were ok and that the worst was behind us.

All that has changed dramatically now, as both stocks have breached the intraday gap-down low of July 15th and made new lows for the year.  In fact, both stocks have made all-time lows today (Freddie Mac began trading in 1992 at $10 per share while Fannie Mae common stock began also in 1992 at $15 per share. Preferred shares – FNA -began trading May 2008 at $50 per share.)

What’s interesting to note is that the ‘off the bottom’ surge was halted sharply at the 20 period EMA on both stocks (Fannie Mae actually closed slightly above this average before failing its test here to roll back over to make new lows).  In a downtrend, the 20 period EMA often serves as initial expected resistance.

Notice also how volume is significantly lower than the July period, almost as if this bottom is being made in absolute ‘hush-hush silence,’ hoping that no one will pick up on this event.  Generally, new lows being made on reduced volume from previous lows is a bullish non-confirmation, so be sure to keep that in mind before rushing out to get short these stocks at these levels.

Let’s step back and view Freddie Mac’s Weekly chart for clues that could have saved investors such financial pain:

Freddie Mac (FRE) Weekly Structure:

As mentioned above, in a downtrend, the 20 period EMA (regardless of timeframe) can be expected to provide initial (and often significant) overhead resistance.  It’s also the ideal place to enter a short-sell, or to exit a trade you may have held too long emotionally, as it offers favorable risk/reward.  Red arrows mark these zones.

The July ‘savior rally’ is a mere dragonfly doji on this chart, but recall that this rally was indeed a 100% up-move (initially fueled by shorts exiting the market in droves thanks in part to new changes in short selling, namely curbing “naked shorting” of 19 stocks including these.

So, looking at these charts and what’s happened now, it’s abundantly clear that the massive surges of July were caused by a significant short-squeeze or short-covering rally by large funds and traders, rather than a rush to buy these supposedly infallible companies.

Will investors pick up these stocks at these levels?  It’s impossible to tell by the charts alone, but we’ll need to keep our attention to these stocks to see what the level of risk-taking appetite is for funds and investors in these difficult economic times.

For more information, Mish’s Global Economic Trend Analysis released an article today entitled “Fannie, Freddie – $223 Billion Debt Rollover Problem” which includes economic data and commentary.

5 Comments

5 Responses to “New All-Time Lows For Freddie Mac and Fannie Mae”

  1. Ray The Money Man Says:

    Great advice on the low volume. That makes me very cautious, it is no time to short here.

  2. steven Says:

    That is the Fannie preferred issue you are using, not the common (FNM); apologies if you know…

  3. Corey Rosenbloom Says:

    Thanks Steven for the clarification. I’ve added this distinction into the post. I debated on which to use, but figured it would be clearer to readers via the labeling of StockCharts (on the name) to use FNA preferred and then to use FRE for the longer time lookback but you’re right, I should have made the distinction in the post for clarity.

  4. Cruz Tijerina Says:

    Thanks for your informative and as usual concise and interesting post. I believe however that there is a slight mistake since the SEC did not re-enact the requirement for short selling to take place on upticks (this requirement was removed on July 3rd, 2007). What they did do was to selectively enforce (since it was already illegal) the rule on naked short selling, whereby a short seller would have to actually borrow the shares they are intending to short sell. The rule applied to shares of 19 financial institutions (including FNM and FRE) being sold short but did not apply to institutions shorting stock while acting as bona fide market makers. This rule came to an end last week so we are back to normal. It would be interesting to analyze whether this rule being lifted had anything to do with the horrendous market action on FNM and FRE so far this week.

  5. Corey Rosenbloom Says:

    Cruz,

    You’re right – thank you for the clarification. I have updated the post to reflect this change.

    There was indeed a massive rally across many financial stocks (and a corresponding plunge in the 2x ultra-short financials ETF!) so I’d love to know as well how much of it was due to rebalancing rather than new buying. I hope there will be a study of this nature out soon.

    Thank you for the comment.