January 11, 2008

After a couple of good days in the market, the bears once again stepped in and decided to regain control of matters. Merrill Lynch was rumored, according to a news report, to have about $15B in further subprime writedowns. Adding to those problems was American Express announcing that slower consumer spending and customers walking away from their credit card debt will hamper their profits. A sluggish spending report also had its affect on the market also.

It’s hard to feel sorry for the credit card companies when they have for years on end allowed consumers to live far beyond their means. In fact, we believe that this is a looming problem that the market has yet to tackle. Consumers are more than ever in debt, and the idea of actually putting money aside for a rainy day has fallen on deaf ears in recent years. Double-digit interest payments can be overwhelming for anyone, and when they are made to feel that credit is another name for “free-money”, problems will arise, and it is likely American Express’ announcement is only the tip of the iceberg. However, that is a problem for another day, and is unlikely to worry investors anytime soon; just something to keep in the back of your mind.

Back to the current issues. Friday’s report of a Merrill Lynch writedown was very significant, and was one of the major reasons for the sell-off on Friday. However, the report from American Express was probably just as or even more significant, as it showed signs that the crisis in the mortgage markets were beginning to show early signs of leaking into other markets as well. Interestingly enough, the financials were up very strong, despite a tough day for the overall market. Likely, news that Bank of America is going to buyout Countrywide, and other banks are going to seek more capital from foreign investors likely helped assuage investors of their fears, and that the situation might be turning the corner for the banks.

Let’s review the charts…

The last four days in the market has seen some consolidation in this index, even though it has been extremely volatile. Often times this is regarded as a time for the index to take a breather before continuing its current trend (in this case, it would be downward). The upper area of the index’s recent price consolidation is where we would consider creating a short position at.

The S&P has been a bit more difficult to understand at this juncture from a technical point of view. The November lows have not been at all an area of support or resistance. While the prevailing thought is for more price deterioration, it would seem unlikely for the market to put together enough positive days to retest the December lows which are noticeably higher than the previous month’s lows. With that said, it is likely we will see the February/March lows tested, and should be a pretty fierce battleground between the bulls and bears.