Sep

16

Market Report – September 16, 2007

Filed Under Market Snapshots 

All major US equity indices rallied last week, albeit on light relative volume, to recoup the losses that were absorbed on the previous Friday, which had both fundamental and technical impetus.  The sell off on September 7, seems to have been a result of continued instability in the credit and homebuilding markets as Countrywide Financial Corp. announced it planned to cut up to 20% of its workforce.  However, the bulls had no help from the technical side of the market that day either, as several indicators including fast stochastic and rate of change momentum models pointed to extremely overbought levels on the previous day.

However, as alluded to earlier, the markets did rally last week with the DJIA gaining 329 pts for the week to end up trading on Friday at 13,442.  The broader based s&p 500 index added over 30 pts to close at 1484.25, and the NASDAQ composite also followed the way of the bull finishing the week up over 36 pts to 2602.18.  Crude oil prices briefly peeked its head over the lofty $80 per barrel mark before settling on Friday at $79.10, yet the noise out of Washington still purports that inflation is under control and rate cuts are necessary.

Technically, all of the averages have been basically toeing the line of the 20 day simple moving average, while vacillating between the 200 day sma as support and the 50 day sma as resistance, with little volume.  All of this is, ostensibly, in anticipation of the allegedly necessary rate cut that will be brought to fruition on Tuesday.  The question no longer is if there will be a cut but how much.  Conventional wisdom would appear to assume that a 25 basis point cut would lead to an equity sell off, while 50 pts would see a rally.  However, with the tens of billions of dollars that was recently flooded into the economy to aid the ailing credit markets, one must wonder just how much more the US dollar can be devalued.  The comments made by FOMC chairman Bernanke will also be under great scrutiny as many economic analysts have already priced in 100 points being shaved off of the fed funds rate by years end.

Macro economic data is also due out this week which may or may not support this easing bias.  On Tuesday the August PPI will be released.  On Wednesday, the August CPI and August Housing Starts are due, and Thursday will see August Leading Indicators and The September Philadelphia Fed Survey.  In addition, earnings season is here once again and many companies will release their numbers, including several financials which could affect the markets as well.  One must wonder though, how much lower the dollar can go against other world currencies and if there is an egregious mispricing, where would these markets be if that mispricing was ever corrected?

Gregory Wolfe
The Options University

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