January 30, 2008
We got the volatility that was expected today, the rate cut we predicted, and the head-fake that we had warned investors on. The major indices flat-lined for most of the day, however once the Fed made their 50bp cut the market soared over 1% on the day. However, following a downgrade of the credit rating on FGIC, stocks gave back their gains and saw the indices finish in the red. The area that we were surprised in was that the market did not finish in the green. Yes, we did get the reversal in price that we expected, but we actually thought that if there would be a “head-fake” it would be to the downside on news of a 50bp cut, and then a strong rally – but it was actually the exact opposite. The uncertainty in the Fed and what the market’s response would be was the main reason why we stayed so lightly vested up to this point. But with the decision done and over with, we are going to put some capital to work now.
Today’s action undoubtedly stalled the hopes of a continuation of the recent rally that we had seen this week. The bears showed themselves to still be in control of matters. The weak volume in the most recent rally shows us that the bulls had very little upward resistance in the form of short selling, and that there was also very little conviction to put a lot of capital to work on the long-side. This was further made evident today, when gains were quickly wiped away by the bears as they were able to pounce on the intra-day rally to begin another possible test of last week’s lows.
We believe that putting any major capital to work on the long-side carries substantial risk, as the pressure seems to be downward at this point, and a likely retest of the recent lows are in order. Preserve your capital and don’t take to many gambles. Also – Keep you stop-losses tight.
Let’s review the charts…
The NASDAQ did very little for most of the day, however, once the Fed made its decision, it didn’t take long before the index took off. However, it was unable to hold those gains as the market consequently sold-off.
S&P was the leader to the downside for today, as it too was unable to keep the rally going. At this point, we are skeptical whether the index can continue the upward rally without first testing its lows.