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Market Analysis January 8, 2008

Filed Under Market Snapshots 

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After two weeks of holiday interrupted, low volume trading, the US equities markets got back on a regular schedule yesterday and it looks as though the weakness could be with us for some time for fundamental, technical, and geo-political reasons. With the dollar at historic lows, energy at historic highs, top lending institutions denying rumors of bankruptcy, and the always uncertain status of US diplomatic relations in oil producing areas, it would be very difficult for even the most steadfast contrarian to engage in a bullish argument here. One caveat that I will add to that statement, however, is that the largest positive price movement days usually occur during primary downtrends so don’t be surprised to see a day where the INDU adds 400 and the COMPX gains 100.

 

But the general gloomy scenario continues to loom, and it is difficult to avoid reference to the dirty word of “stagflation” especially since it recently was on the omniscient lips of former Federal Reserve Chairman Greenspan. Crude oil briefly touched $100 per barrel twice last week before retreating to slightly over $95 per barrel yesterday, which is, depending on calculation method, just about on par with inflation adjusted all time highs of the early 1980’s. Add to that the compounding data that is pointing directly at an economic contraction cycle, and it would seem that additional downside is waiting in the wings, regardless of the smoke and mirrors that is being used to manipulate the global liquidity situation.

Of course anyone who is an Options University/Options University Strategist student or subscriber would have been prepared for this downside by being properly hedged and completely expectant of the movement that we have seen. But the beat goes on, and last week was a very interesting one as it pertained to the manner in which the markets digested macroeconomic data. For quite some time, recessionary data had been construed by the markets as buying stimulus, simply for the fact that it would undoubtedly cause the FOMC to ease monetary policy and therefore prop up the markets, artificially in my opinion. However, beginning with two events last week, the ISM index on Wednesday, and the employment report on Friday, that paradigm has begun to change. Both numbers came in below market expectations quite significantly to add to the recessionary case. However, after each report, instead of rallying in hopes of further cuts, the markets tanked quite drastically. And with the fed fund futures seemingly pricing in another 50 bp cut at the Jan 29 meeting, the subtle recessionary news released by AT&T and CFC today, resulted in a nearly 300 pt. tailspin in the INDU.

Technically, all three major indices have closed below the November lows, and the SPX closed today below its 500 day simple moving average. Moreover, after finding obvious, although temporary, support at several Fibonacci retracement levels from the March low to the October high, the only level left is the 100% for the SPX and that would bring us to 1364. As foretold by the staff at OU, the VIX reverted to its mean from the December 24 low, coincidentally at the 200 day sma, to add almost 38% in two weeks. There are a lot of ways to make money in these markets, but only if you are educated enough to take advantage of the opportunities.

Gregory Wolfe
The Options University

 

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