Late Friday, the five year channel and the pennant formation were broken to
the downside as oil prices and the jobs reports pushed recession fears up.
The Volatility index (VIX) aka the fear index: moved up to near 24 which is
surprisingly low considering Friday’s drop. I would have expected it to
climb into the high 20’s if we were seeing panic setting in.
We also have anticipation building over the start of the 4th
quarter earnings season and the expectations are creating pessimism. The new
year is now off to a bad start and those in stocks are down 4-5% already. The
probability of 2008 being a bear year seems likely. Therefore, overall goal
for this year will be simply to end it a few percent into the positive. That
may change if the situation changes. As it currently stands, the tactic will be
to play bonds and try to catch the occasional extreme oversold rallies here and
there.
The ADP employment numbers were strong last month and are
now neutral compared to the moderate Dept of Labor report last month and the
weak report this month.. We have seen significant revisions to the jobs reports
in the past few months. Friday’s alarmingly low reading may get revised
significantly upwards later. Let’s not forget the incident of the negative
jobs report we got over the summer that was revised to a large positive. That
incident drove the market down sharply initially, but follow on data revealed
the US Jobs market was still healthy.
With the breakdown of the five year channel, a long term
strategy would be to simply move to bonds and wait things out. This was a
strategy I was considering at the start of the holidays but decided against it
given the seasonal strength the usually accompanies the start of the new year.
Although we did not see that strength materialize last week, January is usually
a strong month and we may still see some relief soon. The market is due for an
oversold rally but it is also looking very risky because it’s sitting below the
five year channel. It is reasonable to expect a bounce at this point. If the
market moves back to the bottom of the five year channel on Monday, then I will
hold onto a stock position in anticipation of a rally, otherwise I will start
trying to offset my losses with bonds.
If we do get a rally this week, I would prefer to exit the
market anywhere close to 1490, but I’ll be happy to exit a 1470. The resistance
at the top of the pennant should hold. It would take a significant improvement
in the fundamentals to see the market trade above that line. With the bottom
of the five year channel broken, I would expect a retest of the lows and a move
lower on the next downswing.
