Thursday, February 7, 2008

State of the Market - 2/7/08

An up day today in the markets, but there was a ton of volatility throughout and it is hard to tell for sure what today’s action means. Poor retail sales reports and poor guidance by tech bellweather Cisco caused futures to be down a substantial amount in the pre-market, so I was surprised when the S&P briefly went positive right after the open. However, this was short lived, and the markets began to sell off, only to be followed by an super-quick bounce as a Fed-head came out and told everyone that the Fed will continue to throw more money at this problem through lower rates in the future. That bounce sold off, and trading was choppy until around lunchtime, when the indexes started rallying and continued to rally hard, with the Nasdaq being up over 1.5% around 2 pm. This rally was also sold off hard, but the indexes bounced again near the close to end with marginal gains. Trading is never easy, and this market is proving that. If the afternoon rally held, then there was a good chance of continuing upward the next few days, with so many bullish reversals being put in. It didn’t, though. If the afternoon selloff held, then it would be quite obvious (with two negative intraday reversals in a row) that we would continue lower and test the previous lows in the next few days. It didn’t, though. Basically, we got a day today that doesn’t tell us much and makes predicting the next few days hard in my opinion.

Supposedly, part of the morning advance was caused by a Fed-head commenting about the possibility of more interest rates in the future. I continue to be amazed at how this market can be driven higher even by the hint of more interest rate cuts in the future. I don’t know if these are institutional investors or just retail investors that watch too much CNBC. If you study history, you will notice that the Fed typically cuts interest rates during a downtrend – look at 2000-2002. There is a reason the Fed keeps cutting rates – the economy is obviously in bad shape. If it wasn’t, why would they be cutting? Historically, the best time to be invested in when the Fed is raising rates, not cutting. They raise rates to cool off or slow down the economy, which is an obvious sign that there is growth happening. As an investor, that is what you are looking for. It might seem counterintuitive, but to me it seems like common sense. Invest when the economy is growing and don’t invest when the economy is slowing down – seems pretty simple. And am I the only one who thinks, based on the number of comments about continuing these cuts and the amount of cuts that have already been made, that we are in a lot worse shape than people think? If we were just entering a slowdown and not a major recession, or if the credit problem was just a small blip that is contained rather than a financial time-bomb that is just waiting to explode, why would rates have been lowered in a one-week period more than any time in the past thirty or so years? When the Fed starts giving clues that they are done cutting rates, then maybe I will start paying attention. Then maybe the worst will be behind us and it will be time to look for good stocks to buy. As long as they continue to cut, history tells us the market will likely continue lower.

Speaking of the Fed, I turned on CNBC for a minute this morning to see what the futures were doing and I saw the bald blabbermouth spouting off about (what else?) the need for more rate cuts from the Fed. Does anyone else besides me think this is absolutely ridiculous? How long is it going to be before someone in a position of power realizes that throwing more magically-created money at this problem is both irresponsible and extremely short-sighted? I thought it would take a Hillary Clinton victory before socialism was officially established as our government of choice, but I am now thinking that this just may already be the case. At the first site of any economic or business problem, people automatically look towards the government for some sort of help or bailout. In a true, free-market society, the idea that our country was supposed to be based upon, the government does not intervene – they let market forces play out. We are getting farther and farther away from this concept and the farther we go in our current direction, the harder it will be to reverse course. This really does worry me as a taxpayer and an American citizen.

And speaking of Cramer, I do not watch his show or pay too much attention to what he says or writes, but I haven’t been able to ignore some of the calls he has been making over the past two weeks of this bear-market rally - telling people that the financial bottom is in, saying that everything is fine in the housing market, etc, etc. He is certainly entitled to his opinion and can say whatever he wants, but I believe it is getting to the point now that a lot of people are going to be hurt financially by his ridiculous, short-sighted calls. He flips and flops more than a fish out of water. People that watch his show and read his books are likely trusting this guy and making decisions based on what he says, and I am guessing that many will lose a lot of money over the next few months because of him. In the end, it is their fault – they are the ones that have to make the decisions – but I believe his TV show and “celebrity” affect what he says, feeling that he has to keep making bold predictions and calls. Telling people to get in and stay in cash is not very exciting or keep many viewers, even if it is the most responsible suggestion that can be made.

I was stopped out of MTL today, and this stock is frustrating me. This is my third attempt to short it and the last two I’ve been stopped out with marginal losses. Obviously I am timing it wrong and I don’t think I waited for the volume confirmation I need to. I am still pretty sure it will crack soon enough – I just may not be on board after getting burned a few times already. William O’Neil states in his book that shorting is difficult because of the timing, and you have to be persistent and may be stopped out several times before hitting the “sweet spot” and pick up a quick 20% gain. I am finding that out now.

Nothing to do right here but see where we go in the next few days. After today, I really don’t have a feel one way or another. There were a lot of bullish reversals in stocks today so maybe that is telling us something. If and when we get closer to the recent lows, things will get more interesting and more opportunities might present themselves then. Until then, manage positions, sit back, and see what happens. Good luck.

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