Saturday, 9 February 2008

Next week: Another rally attempt or the next round of free falling?

It was a volatile ride for the markets during the last week. A follow-up of the rally from the previous week never materiliazed as several noticeable pieces of negative news reiterated the story of recession skillfully narrated and promoted by the Bears and their talking heads. On the statistical front, we had poor auto and truck sales in January, a very recessionary number for the January ISM Services Index, falling pending home sales in December, unimpressive December factory orders, and a buildup in wholesale inventories in December.

Another disturbing noise was from a series of public apprearances by senior Fed officials who seemed to be sending the markets down every other moment they were opening their mouths. Somebody needs to introduce a public quota for speeches made by these guys. One week they talk about economic recovery and their willingness to reduce the rates as long as it is necessary, another week they talk about a danger of recession and the close attention that they will pay to inflation numbers. Please give my a break. The realistic inflation rate in the States is above 15% already as indicated by the recent growth rates of the M3 monetary aggregate (which by the way has not been published anymore for very unconvincing reasons). They keep printing money, creating debt and injecting this paper into the economy like some crazy monkeys, and meanwhile they are talking about inflation concerns... One constructuve thing they can definitely do is to elect a single speaker, let it be Bernanke, and let him alone spreak in public. Otherwise, they look like a bunch of uncoordinated and conflicting big egos who pretend to be I-know-everything monetary experts, yet at the same time do not have a consensus of sound opinion on the macro organizational level, each trying to add his extra five cents to the public debate.

Next week, we have a number of important U.S. stats being reported, including: the Treasury budget on Tuesday, Feb 12th; January Retail Sales and December Business Inventories on Wednesday, Feb 13th; and January Industrial Production and Capacity Utilization on Friday, Feb 15th.

Meanwhile, the U.S. indexes are completing a short-term triangle formation. During the upcoming week, we are likely to see a breakout in either direction. If the Dow Jones closes below 12,000, the markets are likely to plunge into the next round of free-fall days sending it to 11,600 or lower. If it breaks out above 12,350, then another attempt of a short-term rally up to 12,600+ is possible. Similarly for S&P500, a close below 1,320 is likely to continue a move down to 1,260 and lower, while a breakout above 1,350 can send it up to 1,410+. The outcome certainly depends on the news during the upcoming week. Given the fact that Bears have been successfully taking over the media lately, a chance of another sound rally attempt is slim.

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