Well its pretty clear at this point that you can scrap yesterday’s blog. Though yesterday hinted that it may have only been a dead-cat bounce that propelled yesterday’s market on moderate volume, today’s action was clear and definite. The Dow, NASDAQ, and S&P each fell 360, 76, and 44 points respectively. To put it mildly it was a tough day for the bulls. Whereas before investors felt like the market could weather the credit problem and continue the trend upwards, its now becoming apparent that the credit concerns may just be too much for the market to handle unless things get suddenly and dramatically better. But to do so, is to hope, and we don’t trade on hope. We have to be honest with ourselves and in markets such as the one we are facing currently, honesty is hard to come by. It requires sucking up the pride and facing the reality that is often times so clear but our ability to see it is often clouded by our wants, hopes, and desires. To not face the music, is to do so at your own expense and it just isn’t worth it (is it?).
So let’s be begin the music! The major indexes made no attempt to hold major support levels. The S&P was the most noticeable crushing the 1490 support level to finish at 1475. While we are not going to throw in the towel on behalf of the bulls, neither are we going to be naïve to the serious dangers that lurk in the market. With any major bull trend in the market, it usually requires that the financials are in support of it. As we are all aware, this year, financials have been anything but supportive of the positive returns year-to-date.
However, the news negatively affecting the market is much more then just the prevailing credit concerns (though that is the dominant concern). The dollar continues to deteriorate in value and China announced today that it would shift its interest to other concerns besides the greenback namely the purchase of euros (for those of you who don’t know, China is a HUGE financer of our National Debt). Oil continues to skyrocket though today it did regress a bit after hitting $98/barrel.
If the market continues to act in a manner similar to today then it is going to be hard for the Fed not to take action. However, their hands may be tied as oil continues to move up and the dollar continues to weaken, inflation will start creeping back into the picture, which will prevent rate cuts by the Fed. This is because when they cut the Fed Funds rate, you are creating an environment more susceptible to inflation.
Therefore, we are not going to use today as a clear sign that a reversal has arrived but we will say that we are strongly warning investors to begin tightening their stops and take profits where it is appropriate, as support levels and trend lines have been broken in practically every major index (though not all because of just today). To best summarize today’s action and our concluding thoughts, there seems to be less opposition to the market continuing to going down then there is to it going back up. If there is a bounce tomorrow which is a very strong possibility after a day like this, be cautious and even use it to take profits where necessary. Bear markets don’t usually occur suddenly; rather it is a gradual event that can go without being noticed initially. Simply put, the bears don’t always blow their horn when they arrive on the scene.