Does anyone else wonder what would have happened had the Federal Reserve not bailed out Bear Stearns? If you believe the propaganda, we very well may have avoided financial Armageddon.

But is that really true?

I’m honestly not so sure.

As a die-hard-free-market guy, I have to say that the intervention bothers me at a base level. After all, in most instances, the free market does a remarkable job of clearing excess, and I fundamentally believe that the free market should have been allowed to do just that with Bear Stearns.

I suppose the collapse of the global financial system might be a good reason to intervene, so onward and upward, correct?

For those investors that actively manage their portfolios with exchange traded funds the Bear Stearns bailout provides the “all-clear” for speculators in the financial space. The implicit message being sent was that no matter the disaster, the Federal Reserve will be there to bail you out.

Too bad that homeowner with a noose around his or her neck cannot feel the same comfort, but I digress. The point here is that someone decided that Wall Street was more important than Main Street.

According to ETF Insider editor, Tim Middleton, investors can take the Federal Reserve puts all the way to the bank. So stunning and absolute was the move that Middleton reversed course in his model portfolio!

In his article title, “Dump the Hedge; Buy Financials,” Middleton sells his UltraShort ProShares position, and for those aggressive investors, he suggests using some of the proceeds to establish a position in the Vanguard Financials ETF.

His reasoning is fairly cut and dry…>The Federal Reserve has put in a floor for the equity market, and investors can and should ride the coattails of this intervention to profits, but there are other reasons to buy as well.

A quick glance at the Vanguard Financials ETF chart shows shares exhibiting a double bottom. Technicians suggest that such a state is positive in that those wanting to sell have already done so.

There being less downside pressure implies future gains, or so goes the thinking. It is not a fail safe method for certain, but investors can and do take comfort when these circumstances are present.

The financial sector has led the way down here thus one can expect that it will be the financial sector that leads the way higher. The very fact that the market did not collapse during the Bear Stearns fiasco may be interpreted as a sign of a bottom.

In some ways we actually did have capitulation as the Dow index swung nearly 1,000 points the day of the bailout.

Falling consumer confidence is another good sign for the bulls. The Conference Board is now at a level not seen since the early 1970s. One would have expected the market to fall hard on the news.

It did not. All taken together, the ingredients may be in place for a sustained rally. At a minimum, there appears to be good indicators that a bottom has been put in place.

Or this could be the ultimate tease and dead cat bounce. Just in case, Middleton is being cautious with his approach. Let’s just say he is dipping his toe in the water.

In either case, investors can take advantage of the save the system at any cost mentality. Armageddon has been avoided, and that may lead to prosperity down the road. Leading the way will be the financials.

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