Market Analysis December 2, 2007

Tuesday, December 4, 2007

Filed Under Market Snapshots 

It appears as if the Federal Open Markets Committee will once again play Superman to the Lois Lane that is the US equities markets. The scary/recessionary macro economic reports and subsequent announcements by Fed chairman Bernanke and his second in command last week appeared to have erased all doubts of the expected December 11 rate cut, and replaced the level headed bearish theme of the last couple of weeks with the “band-aid on a melanoma” bulls who are addicted to interest rate cuts like heroin junkies. They know that a quick fix will provide short term relief, but it is just another step on the way to inevitable disaster.

The 1,000 plus points that the DJIA gave up since the last meeting, and similar sell offs in the other major averages, were due, mostly, to the wire that the fed was walking between the weakened dollar/outrageous energy and commodity prices and the expected fallout from the sub prime lending disaster. This led to, as related in the minutes from the Oct. 31st meeting that were released last Monday, to a “close call” between a cut and a status quo at that particular meeting, while most of the recent bull run was already pricing in a December cut.. However recent dovish data has once again enlivened the bulls and the Dow added 390 pts last week to close at 13,371. The S&P 500 index followed suit to close the week up 40 pts. To 1481, while the NASDAQ completed the trifecta with a net gain of 64 to close the week at 2660. Add to this a sell off in oil in excess of $10 for the week to close at a dirt cheap $88.71, and the S&P finding 78% Fibonacci retracement support at 1409, and you have at the very least an excuse for short covering and profit taking by the bears, if not new bullish positions being instilled by the junkies.

Although breadth was also bullish last week with advancers leading decliners on the NYSE by a margin of 2630 to 930, there were 605 stocks that found new lows while only 144 reached new highs. As we languish fundamentally between true recession and the lure of cheaper money, and technically as all averages toe their 200 day sma, indecision will continue to be the theme. In the week ahead, it would be safe to assume that anything that would give the fed more comfort in a 50 bp cut (i.e. recessionary data, England easing their interest rates on Thursday) will lead to fervent buying, and a scenario more tepid could lead to some selling. However, with implied volatilities still relatively low in the options markets, there are many ways to be profitable here. It also should be taken into account that the anticipation of the cut has recently led to the buying while the activity subsequent to the cuts has been the selling off.

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