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Market Report - September 23, 2007

Filed Under Market Snapshots 

The US equities markets all posted strong gains last week, initiated by a relatively unexpected substantial easing of fed fund policy on Tuesday.  Appearing as a pre-emptive strike against the expected pending recession being predicted by many economists, The FOMC slashed both the fed funds rate and the discount rate by 50 basis points. The move led to a sharp intraday rally of about 250 pts. in the DJIA subsequent to the announcement, which would be expected as the cheapening of the US$ will continually over value the markets along with upcoming earnings numbers.

The issue at hand for traders, directionally at least, is that the markets are at a fulcrum of how the economic data will be digested and thereby if the bull or bear will show up.  Now that the poor data has led to substantial cuts as well as an infusion of liquidity to bail out the credit markets, will bad news continue to be good news (leading to rate cuts) or will the bad news signal a true slowdown and hand the ball over to the bears?  In addition, although the words continue to be “stable” and “in control” regarding inflation, we still see energy and commodity prices in the stratosphere and the dollar faring so poorly against other world currencies that it is at parity with the Canadian dollar.

For the week, the DJIA was up 377 pts to 13820 on strong NYSE volume, with advancing issues outpacing decliners 27-3 for the week.  The NASDAQ composite index gained 69.04 for the week to close at 2671.22, and the S&P also benefited from the cuts by posting 41.50 in gains to end the week at 1525.75.  Crude oil closed the week at $81.62, gaining over $2 for the week, based upon the cuts and predictions of possible activity on the hurricane front which is always good for a little panic buying.

Technically, I don’t see much standing in the way of the Dow reaching its highs of 14,024, but some poor earnings and more news of a slowdown, along with overpriced energy could see a bearish retracement from that high.  This is especially true when it is noted that recent buying activity has put many technical indicators flashing a highly overbought scenario.

As would be expected after the rally in the equities, the VIX saw a sell off last week closing at 19 even on Friday after opening the week at 26.45.  The put/call ratio on the spx remained bullish at 130/100 although less heated than the previous week’s 151/100.  A very busy week of economic data as well, including existing home sales on Tuesday and Durable Goods on Wednesday.  In addition earnings numbers from KB Home on Thursday should allow for a small peek into how much blood is in the housing market.  Interesting how all of this will come to a confluence while the Dow will be flirting with its all time high, albeit in my opinion, an artificial one.

Gregory Wolfe, The Options University

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