Friday, August 3, 2007

Dow Down 281, S&P Falls 39

This chart says it all...

Lesson #26 in my list of little rules: Just because something usually happens (eg. weekly rebound after a weekly slump) doesn't mean it will. One needs to assess the fundamentals.

We now rest on the 50 week moving average for only about the 5th time during the bull market -- something the market avoided last March -- and this time we're back at these levels, not seen since last year, in the midst of a snowballing credit crunch.

Given the present fundamentals, as this has gone well beyond the excuse of fear driven decline due to rumors to driven by real and bad news, there's no reason not to expect the market to probe below 50 wma and perhaps fall to what has been key long term support - the 80 week moving average in the 1375 area.

Don't you just hate it when you have to round things off in the TRILLIONS? That's what investors and speculators are grappling with especially with respect to OTC derivatives. The market is sure starting to fear such a large rounding scheme - that's for sure.

And, is it just me, or has it seemed a trifle amazing that some have been thinking a credit crunch related stock slide would be over in 2 weeks? Those folks who were talking that kind of stuff must be related to those fateful boys of '61, 1861 that is, who thought the Civil War would be over in the blink of an eye. Sheesh, we're not even at Bull Run yet.

117.5 yen is a key area to keep an eye on. Forced carry trade liquidations will be something else the markets will have to deal with, and I have no doubt that we will hear about some fateful hedge fund debacles (how I know the ladder is another story for another time). I would keep an eye on that dollar and if you have time, look at the latest COT report on gold... things are starting to look very interesting there. Crude needs to be watched. $80 on the front month looming ever larger (remember, however, $80+ was hit last year further out of the board when crude was severely contagoed), The backwardation situation of the present time continues to channel money back to the front months.

In general, this past week looked a bit more panicked than last week at this time as American Home Mortgage, a near German bank failure and Bear Stearns, just to name a few, take this market from rumor driven to some pretty dark news.

By the way, this is not the fault of the bears. There is no vast bearish conspiracy. You could be silly and point to blogs on the web for spreading bearish sentiment, but bloggers as a herd have generally been bearish. You could point to tv and say they're spewing the bearish party line, but examine the guest lineup more closely and you'll realize that most tout the bullish party line of 'it's a great buying opportunity'. Remember too, this is the era of being able to short and go long the way six ways to Sunday in leveraged fashion. This isn't 1972 when futures markets were meant for pros and farmers. The swings we see today are related to the leverage of all the nifty financial products available to make bullish or bearish bets. It works two ways - earlier in the week the upward spurts were enhanced by leveraged positions - same with the downside. You can't have it one way. So there is no bearish conspiracy. There is no bearish calling chain, or chain letter that says 'dump no matter what'. No, what we have here is a market reacting to bad news as if it's bad news and magnified reactions due to how the system has evolved and involves plenty of leveraged products.

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