December 14, 2007

This Friday’s selling session had an eerie feeling of past Friday’s; namely of those back in November where they were accompanied by heavy selling. This day was no different. After an early attempt by the bulls to fade the gap, the bears took over and never looked back. Major indexes sold off on average of about 1.3%.

The market is losing its faith in the Fed to stave off a recession. When really considering the situation, it seems to be a bit nonsensical for investors to know that problems with the economy exists, and instead of taking the approach and selling their securities into strength, look to a government agency (sounds a bit scary when stated like that), namely the Federal Reserve to artificially propel the markets to new highs by cutting rates. This leads to disappointment when the Fed fails to impress, and investors panic and sell off en masse.

As we have said all along, and as economic reports stated on Friday, inflation remains a concern, and if we continue to see evidence like we have seen recently, the Fed will be unable to aggressively fight off the economic downturn, via rate cuts, and stocks will subsequently sell off.

Let’s review the charts…

The NASDAQ like its counterparts sold off, and the bears were able to stifle the attempts by the bulls to rally in the face of bad news. Because of the volatility and the downward tendencies of the market, capital preservation is a must at these levels.

The S&P also had a rough day. The next logical step for both the S&P and the NASDAQ would be to test the November lows. At that point, we will see a battle ground for the bulls and bears to determine control of the markets.