More of the Usual in the New Year

January 2, 2008

With stocks opening slightly in the positive, it didn’t take long for the market to reverse direction and make the day a tumultuous one for longs. One of the things we could have been seeing here today was profit taking from a tax standpoint. If investors heading towards the end of the year are sitting on profitable positions, there is no way that they are going to sell them before the end of the year. Instead they will wait for the first trading day of the new year, so that those taxes don’t have to be paid until April of 2009. With the market acting as volatile as it has recently, locking in profitable positions as quick as possible into the new year is a desirous standpoint for many in the market.

The news out today, wasn’t so troubling compared to previous news stories. It is more of what has been expected as of late. A report on manufacturing activity showed a decline in activity mainly due to the housing downturn. Because the report was below the “50” mark, it tends to point towards impending recession. Oil finally hit the $100 mark today as Gold also flew past $850/ounce.

We’re still bullish on the markets at this point, but we’re not throwing caution into the wind. The market has been resilient up to this point and unless given reason otherwise, we are going to continue a bullish yet cautious outlook. That means that while we will be entering into long positions we will also look to hedge some of our risk to the long side by shorting a few companies.

Let’s review the charts…

The NASDAQ had a difficult day to say the least as investors sold the news of a possible slow-down in the economy. While the index dropped below its long-term trend line, we know that the last three instances that this has happened the index has managed to rally. Our area of concern will be if it drops below its December or November lows – particularly the November lows.

The S&P is also at a critical point. If it breaks the December lows, it is likely to travel down to test the November lows. A rally would seem to be in order over the next couple of days, as the market is beginning to show signs of being oversold on a short term basis.