Wednesday, January 30, 2008

State of the Market - 1/30/08

As expected, it was a crazy day in the markets today as the Fed gave traders what they were asking for, cutting rates by 50 basis points. After being marginally lower throughout the day, the news of the rate cut propelled stocks higher around 2:15, and after a little volatility, they ran higher the rest of the session. That is, until around 3:15 or so, when the indexes, after all being up at least 1%, reversed, sold off hard through the rest of the session, and closed near their lows. Volume was higher as to be expected on a Fed day. So another bearish reversal – the second in four days – and it looks like this bounce may be over. I say “may” because I just don’t know to expect. A lot of economic data is coming out over the next few days which should make things interesting. I thought we were done last Friday, and we proceded to continue to rally for a few more days. It is also always hard to tell the true trend of a Fed day until a few days after. There is no doubt today’s action is bearish, but anything can still happen Thursday and Friday.

S&P 500

Charts from Telechart, Courtesy of Worden Brothers, Inc.

Tough day for me as although I was not surprised by the Fed cut, I was surprised by the market’s reaction and covered my shorts intraday, one for about 8% gain, one for a marginal gain, and two for losses of around 7%, both larger than I normally take because I was holding until today. Two of them had earnings tomorrow as well, so that played into my decision as well. I also finally took the loss on my SKF position that was larger than I normally take. My account wasn’t hurt in a major way over the past few days – I am about 6% off my high for the year, but am still up around 34%, so I have to remember that. However, the market closing the way it did, which may confirm the thoughts that I have written about the past few days, is extremely frustrating, and it is nobody’s fault except my own. One of my goals at the start of the year was to not watch the market intraday. Not showing the discipline to do that really cost me today – I reacted to conditions that were very volatile and ended up costing myself both some money and some really well-positioned shorts. I am ticked off at myself right now, but there is nothing I can do about it but learn and not let it happen again. It is even going to be worse over the next few days if we do continue lower. If I do end up being correct in my read on the market, but barely profit from it, it will be a very hard lesson to learn. I have a long way to go to be a master trader and today reminded me of that fact in a painful way.

In terms of the Fed’s decision, I am not an expert on fiscal policy, but it does seem a little ridiculous to lower rates by 1.25 points in little less than a week. I believe this is the biggest increase in the shortest period of time for something like 20 or 30 years. I didn’t realize this, but I believe that it is quite obvious that the Fed’s job is now to prop up stock prices, not regulate money for the economy. What traders want, traders seem to get from Mr. Bernanke, and now it will likely continue to get worse. When inflation comes in around 5-6% in a few months, I am sure we will all be happy that interest rates are so low. I personally find this to be irresponsible, but our entire economy seems to be based on fiscal irresponsibility right now, starting from our government on down to individuals. I guess it is fitting then. If we do continue lower here even after these cuts, the Fed will have egg all over its face and should lose a lot of credibility.

I went back in two positions at the end of the day, so I am looking for more follow-through to the downside over the next few days. There are a lot of possible shorts out there and I will keep an eye on them. A continued move lower certainly isn’t guaranteed however. All I say for sure is that it will be an exciting two days. Good luck out there. Hopefully you’ll trade better than I did today.


Charts from Telechart, Courtesy of Worden Brothers, Inc.


Asunder said...

I agree with your point of view on the fiscal irresponsibility in this country. I also like the Digg button you just added... pretty neat. I haven't seen any other stock/finance-esque blog have it.

Out of curiosity, are you a technology kind of guy?

Mac said...

Thanks - if you google "add a digg button to blog" or something like that, you will find how to do it. It's not too hard.

What happened to Chartology? I enjoyed reading your blog.