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CIT files for bankruptcy, may help fuel the market sell off
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CIT is Bankrupt
CIT Group filed for bankruptcy protection on Sunday, November 1, 2009. It was widely anticipated heading into the weekend, and finally the decision has been made. CIT's creditors have already approved the reorganization plan.
Small to Medium Size Business to be Affected
Under the plan, CIT expects to reduce their total debt by about $10 billion. The operating units are not in bankruptcy, and they plan to continue lending. Even if CIT remains open, the long term prospects of the company are still uncertain and could leave more than 1 million small and mid-sized businesses looking for other sources of funding.
May Impact U.S. Growth
Banks remain tight fisted which may make it hard for these companies to obtain the financing they need to grow. The third quarter GDP of 3.5% was great news for the economy, but bankruptcy news such as this dampens the outlook for continued sustainable growth.
CIT May be the Catalyst for a Huge Sell Off
The 2009 Dow Jones Transports continue to mirror the chart of the 1987 Nasdaq. If this continues to play out, there will be a significant pull back or even a crash next week. Heading into this weekend, I knew some sort of bad news would come out that would help fuel the sell off next week. It's yet to be seen how significant the pull back will be, but the Nasdaq crashed 30% in 1987 so the sell off could be staggering.
Technical Analysis of the Daily Chart of CIT
Technical analysis of the daily chart of CIT showed some bearish signs for the stock. On October 29, CIT closed at $0.95 and formed a bearish engulfing pattern which indicated that prices would drop much further. It's unclear how low the stock will open on Monday, but signs such as these are good warnings to avoid buying a stock.
Bring on the Fear
CIT's bankruptcy should be a wakeup call to investors buying this recent market rally. Remember it was just a couple of weeks ago that the Dow surpassed 10,000, and everything looked rosy and bullish in the market. All is not okay in the economy, and announcements such as these should help put fear back into the market.
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