Sunday, 3 February 2008

Next week: Indexes at resistance levels and testing of a bear rally

It's been quite a week in the markets. We witnessed the first bear rally since the stock markets officially entered into the Bear territory not so long ago. All major indexes finished te week with positive weekly performance figures. Of course, the major factor behind these moves has a two-part series of interest rate cuts by the Fed, with latest 50 bps cut announced during the regular meeting last Wednesday, January 30, 2008, which brings the total recent cut to the whopping 1.25%. Then there was also Microsoft announcing its intention to buy Yahoo, along with several other ongoing and fresh M&A talks and rumors, which somewhat boosted the markets on Friday.

Even the weak non-farm payroll, hourly earnings, and construction spending numbers, which were reported last week, could not spoil the short-term bull party. There is still quit a bit of money alongside, waiting to jump into the equity market on the long side at any hint of a rally attempt. The players are quite cautious and nervious though, so any strong short-term bursts on the upside are followed by profit taking which considerably mutes rally results.

It was quite amusing to see stocks of financials, retailers, home builders, and mortgage companies rally last week. I understand that they among the sectors that mostly benefit from rate cuts and any resulting boosts n consumer leverage and spending, but come on... We all know that these sectors have entered the big-mess territory recently and it will take more time for them to recover for good. Otherwise, there were a few very good 20-50% rallies in some of these stocks last week, mostly due to the fact that these stocks were deeply oversold and beaten up during the pre-rate-cut sell-off. I was tracking a few of them, but did not enter due to risk considerations and constraints on available funds. In any case, I will continue watching them, and some of these stocks will become some of my swing targets as soon as the next rallies arrive and later on, when the relevant sectors will turn onto the steady recovery track.

For now, the market conditions seems to be very risky and volatile. It is pretty funny that as soon as the markets rally a little bit, which is due mostly to short covering, short-term speculative long moves, and targeted interventions by major institutional players, then you start hearing people talking about the end of this market correction and more long bright years ahead of us. There certainly will be bright years in the stock markets, just not now or in the nearest future. According to the historical observations, we are about to enter into the next, quite ferocious down leg of the Bear market once this rally is over, and it looks like it is going to happen pretty soon. During the last week, the markets quickly moved from being deeply oversold to the overbought condition, so according to the technical charts we have at most several days (1-3) worth of fuel left in the tanks of this rally vehicle. Then the shorts will take over again and we are very likely to "enjoy" the next wild sell-off.

There is nothing particularly optimistic about the current fundamentals of the U.S. economy and the global financial system, which would make us think that this whole recent financial mess and economic slowdown are just a little corrective bump on the way to new market highs. There is a price to pay for the financial and housing bubbles, and it will take at least a couple of quarters, if not years, to ease the issue and move the economy on its way to the new, even bigger bubble. Oh, sorry, I meant to say "on the way to strong economy recovery." :-) I am planning to post on the bubble situation pretty soon.

I sold my WFC position on Monday at a decent 14% gross profit. Since then the stock continued rallying another $3 per share. G-r-r-r-r. Well, it is better to have some certain positive outcome at the end than taking chances. It is a very shaky environment right now and things can turn around in no time. So, I do not regret much about the lost chance to make an extra 10% profit. In any case, I am still learning to trade. I currently have a couple of other short-term positions which I am ready to close if the need arises, so we let's see how the things will work out during the next week.

During the upcoming week of February 4-8, 2008, we need to take into account the numbers on January auto sales (much lower then expected), December factory orders, December pending home sales, and a series of public appearances by senior Fed and government officials, among other things to watch among government stats and tips. Of course, the continuing Q4 and FY2007 year-end earnings announcements will make or break the weather during this week as well.

The major indexes have approached the strong resistance levels at the end of the past week, so Monday and Tuesday will be the testing days when the bulls will face very strong pressure from the selling side. The resistance numbers to watch for the Dow index are 12,800 and 13,000 and for the S&P500 are 1,410 and 1,440. We are very close to these levels. It will be a fun week to watch.

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