December 17, 2007

The atmosphere on the floor of the New York Stock Exchange couldn’t be any gloomier then it is right now. Investors and traders alike are starting to realize that a storm is on the horizon and that they are ill-equipped to weather it. The word stagflation, which is an environment of inflation and a weakening economy, is being spoken of more and more each day. In this particular situation the increase in inflation (due primarily to rising oil and food prices) will grind our economy to a standstill. Reason being, is that our economy does need rate cuts, however the Federal Reserve is finding themselves in an increasingly tougher position to grant investors’ wishes.

Investors need the Fed to lower rates, because there is no other source of positives for the market in its current state; consumer spending is tightening (evidenced by the weak Christmas sales to date) as well as earnings reports being received less favorably and growth in the S&P starting to slow some. Those were major drivers in the market’s bull run over the last four years. If the market does not have these traits, and instead has a financial/credit dilemma along with a Fed who might have its hands tied on how much it can help the economy, then how will the markets continue its rise to record-breaking levels? It’s a hard point to refute.

However, if you are a Shareplanner subscriber you receive our Short recommendations to take advantage of these downswings.

For all the major indexes, look for them to test their November lows. At that point, expect the bulls to step in and try to counter the momentum of the bears.

Let’s review the charts…

The NASDAQ broke its long term trend line and likely will continue to sell off, with a few positive days wedged in between, until it gets the opportunity to test its November lows.

The S&P had much less damage done than the NASDAQ, but it still had its own problems. Currently, the index is in a free-fall and is likely to find some support at the November lows where the bulls can be expected to put up a descent fight.