December 19, 2007

Almost identical to yesterday, the market opened up strong, sold off, and then at the end of the trading session, the bulls managed a meager rally to close out the major indexes in a mixed fashion. In other words, it was a breakeven day.

There were some interesting news items to note – namely, a $9.4B write down at Morgan Stanley. How did the financial sector react to this news? It traded with the rest of the market, closing slightly in the red. How did Morgan Stanley respond? In the green! (with the help of $5B investment from the Chinese Government) What does that tell us at this point, about the financial markets? That bad news is becoming better priced into the stocks of the general market. However, that does not mean we are out of the woods. However, it should be noted that with as bad of news as it was for Morgan Stanley, for them to close in the green, shows signs that investors are becoming more accepting of the problems with the current subprime situation. That doesn’t mean, though, that we are done having further significant sell-offs. The status-quo can change within the blink of an eye, and what investors consider to be acceptable at this point in time, could become yesterday’s news upon further (and unexpected) news of write-offs from major banks and lending institutions.

Our point here? There are a lot of pundits out there that will lead you to believe that the worst is over and we are ready to resume our climb to new highs, but don’t be fooled. The market has always been and always will be unpredictable. We still believe that the market will test its previous lows established in November before having any possibility of creating a new long-term trend.

Let’s review the charts…

Uneventful day for the NASDAQ as it was the only index that managed to finish in the green. The one item of note with this holding was that it was unable to finish above the long-term trend line. With Christmas around the corner, you can expect a number of investors to begin their vacations and as a result volume will decrease significantly.

The S&P finished the day in a sideways fashion with neither the bulls nor bears being able to gain traction. At this point the markets are still in an oversold state, and it shouldn’t be surprising if we see a 1% – 3% rally over the course of the next week.