Thu 16 Aug 2007
What to make of the strong finish in today’s market…? The Dow reversed a full 300 points to finish down only 16 points for the day…? that’s a whopping 3% drop, followed by a 3% rally all in the span of a single trading day.? That kind of action usually signals a short-term bottom, but I’d be careful making that assumption…
We had a similar big one-day reversal as recently as Friday, August 10… the dow hit a low of 12,958 before closing back at 13,239 — a 281 point recovery. What happened next? Bad news on Monday caused this week’s price action, and all of the liquidity injections from the central banks could not get stocks in the black for even a single day (so far).
Interestingly, the Dow and the NDX closed spot on their 200 day moving average. The S&P 500, nasdaq composite, and Russell 2k are all well below their 200 dma. Medium term (1 year+) trend lines have already broken on most of the major indexes.
After today’s strength, tomorrow is set up for a bullish day. If there isn’t strength, then most likely we’re going to have some additional jarring drops. If there is strength, then the question of the day will be, how long with the strength last?
Also worthy of note is the yield spread… the 30 year / 3 month has shot up like a bat out of hell. Looking at a longer term view, there’s still a long way to go… And the contraction is happening even while the FOMC has pushed the overnight rate down to 4.9% despite the lip service about not lowering rate targets.
Here’s a quote from Mish:
Yes, already. David Greenlaw at Morgan Stanley noted that although the Fed Fund rate is officially 5.25%, as a result of various Fed open market operations “the funds rate averaged 4.51% yesterday [2007-08-14], and then opened at 4.75% this morning [2007-08-15]. Indeed, the cumulative average for the 2-week maintenance period that ends today is 5.04% — well below the official 5.25% target.” Greenlaw went on to call this a ?temporary? easing of policy on the part of the Fed.
I’ve personally moved to a hedged position — puts offsetting the longs that haven’t hit trailing stops or that I don’t want to sell (yet) for tax reasons…? There might be a sizable bounce over the next few days/weeks, but I’m in capital preservation mode and don’t feel like risking more than is appropriate given the recent price action.
August 16th, 2007 at 9:59 pm
One other thing to add to the market mix tomorrow — equity options are expiring. There’s nothing quite like an expiration day to make matters more complex!