Strength in Times of Weakness

January 28, 2008

Interesting day in the market as the major indices opened up lower and then saw the bulls jump on the dip, and continue to rally for the rest of the day, as the bears repeatedly attempted to sell the rally as it did on Friday; but this time they were unsuccessful in their efforts. A weak new homes sales report actually spurred on the rally making investors believe that the Fed will have no other choice than to act more aggressively to fend off the possibility of a recession.

While investors saw today’s action as positive, investors and traders alike continue to remain on edge as we get closer to Bernanke and Co. big decision on Wednesday. We are likely to receive a rate cut of some kind, but the extent of the rate cut remains unknown. We will dig further into this in tomorrow’s write up in order to be fully prepared for the announcement at hand. Regardless of the Fed announcement, trying to game the decision is usually futile and costly to those who think they can predict the market’s response. Often times the initial direction in the market upon receiving the Fed’s decision serves as a “head-fake” as it ends up taking a different direction once the program buying begins.

The urge to jump in tomorrow and Wednesday will be hard to pass up, especially if we test the August lows again and fail to break resistance (a likely shorting opportunity). Nonetheless, be patient, and let the market play itself out. If we end up putting together the groundwork for another bull run, there will be plenty of opportunity to get in on the action. Until then, manage and preserve your capital feverously.

Let’s review the charts…

NASDAQ was the laggard in today’s action, rising slightly over 1%. The volume was weak, and will likely continue as such until the Fed makes their announcement, at which point, the volume is likely to kick in to high gear.

S&P was the big winner on the day, rising over 1.5%, but also on weak volume. This tells us that investors are timid heading into the Fed meeting on Tuesday and Wednesday.