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Fund share prices as of: 8/17/07
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Today's Comments (Short Term Outlook)
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Fed to the rescue! When I was writing Friday's commentary late Thursday night, Japan's Nikkei 225 had closed down nearly 900 points, and the S&P 500 futures were down over 20.00, the most negative overnight reading I had seen in years. I went to sleep that night expecting at least a mini-market crash in the morning. I was very relieved that I had moved over to the F-fund. Of course when I woke up the next morning, just minutes after the market had opened, the Dow was up over 300 points. I was very confused until I saw that the Fed had dropped the discount rate 0.50%. Jim Cramer (Mad Money) said if the Fed did not act, he would have expected the Dow to be down as much as 1000 on the day - but the Fed came to the rescue. While I was not able to make those gains since I was in the F-fund, I was thinking about all of those traders and investors who owned the huge open interest of put options (bets the market were going to go down) that went from high profits to worthless in minutes, and the many bears that were short the market and were destroyed in an instant. This discount rate cut was not a cut in the Fed Funds rate, but that will follow in the near future. So has the Fed saved the market, or can this be a sign that things may be worse than the Fed had initially thought - after all, they did not lower rates at the recent FOMC meeting less than two weeks ago? The Fed noted that "market conditions have deteriorated" and "downside risks have increased appreciably"” since it last met on August 7. The action is great news for the market, but only because things had gotten so bad. So we had a huge reversal on Thursday afternoon that was followed by a big Fed influenced rally on Friday. On Friday I had said that the S&P 500, "is also below the 200-day moving average, which is a big obstacle now and could be where any rally finds resistance", and the S&P 500 ran up to 200-day moving average at the open Friday, but couldn't move any higher on the day.
I don't know if that will
happen again this time, but I am trying to figure out if it is best
to jump on board, or to expect another trip down. Waiting for
these tests have gotten me into trouble in the past but we have not
had a correction like this since TSP Talk started 4 1/2 years ago.
A severe drop like this does not usually end with a "V" bottom, but
rather a double bottom test formation like the examples above.
Of course there are some who believe we will test and get another
leg down. Others believe we will move straight up from here. Trader Fred's
TSP
Trader System
is still showing some peculiar actions considering the market
conditions. Normally the system is looking for a spot to get
into stocks after a big drop, but instead it is still showing signs
of worrisome activity. Have questions? Visit our message board for answers.
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