Volume Spike Investor

Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) are seeing one the purest examples of a “gap and crap” pattern that exists.  This term is not meant to be a vulgarity regardless of how it sounds.  This is actually a technical analysis term used to describe a situation where stocks gap up quite high because of news, but after everyone gets to digest the data and run their forward analysis they come to the realization that it’s still just a bad situation.  Needless to say, in that scenario stocks sell off sharply and frequently go negative.

These stocks surged at the open and pre-market because of the governments first inkling of a bailout plan, but it is hard to find traders who really believe that the situation is going to change to a good situation.  Will the situation be less bad? Of course.  We have a government backstop plan in hand.  Will this be a profitable scenario for Fannie or Freddie?  Pangloss says yes, but everyone else doubts it.

These won’t likely be allowed to fail, but there is still a chance that shareholders could be wiped out here.  The government isn’t going to ride in to the rescue for free.

Fannie Mae traded 409 million shares Friday and 134 million shares on Thursday.  At 11:10 AM EST the shares are up 5% at $10.78 on 101 million shares.  Shares opened at $12.88 today.

Freddie Mac traded 397 million shares on Friday and 200 million shares on Thursday. at 11:10 AM EST the shares are up a mere 1% at $7.83 on 115 million shares.  Shares opened at $8.93 this morning.

Sorry for the term used, but it is what it is.  Gap and crap, all the way.

Jon Ogg
July 14, 2008