Update
12/03/07
If I
had to rate the relative ease of market predictions on a scale of 1 to 5 (1
being the easiest and 5 being the hardest) last week was a 1 and this week
is a 3. I would love to pull another Buy and Hold strategy from the bottom
all the way to the top of the five year channel like I did with the last
correction but I think that is unrealistic. I really believe we have a major
market reversal on our hands and a right shoulder on a Head & Shoulders
reversal pattern is as good as it’s going to get. Despite December’s
traditional strength, the evidence is mounting that an economic slowdown is
occurring. Economic slowdown means reduced profits and reduced profits mean
higher P/E ratios: Higher P/E ratio’s means the market is becoming more
overvalued and the way the market will normalize that situation is with
price reductions.
Last
year I said something very similar and with equally sound logic, yet the
market kept rising and I think it blew a lot of us away. We simply could
not get our minds around the fact that seasonality could be that strong.
The lesson is learned and I will not sit on the sidelines while this market
climbs a wall of worry, by the same token, I am not going to assume the best
– the situation on the street is an order of magnitude more tenuous then
last year.
The
week ahead is the lead up to the following week’s Fed meeting and the closer
we get the more the news will be interpreted against what the Fed does.
That means that a bad piece of economic news is seen as favorable for a fed
cut (unless a rate cut is guaranteed) and the opposite could be true -
good economic news could prevent a rate cut (if there’s a lot of it –
but right now it’s looking like a sure thing that the Fed is going to cut
again – so good news is just that – good news).
Do you
see how that works? If the market is doubtful about the Fed’s course of
action the news could produce the opposite effect because of the reaction by
the Fed – what the Fed does is more important then anything else. However,
if a Fed action is very likely, and therefore predictable, then the market
adjusts accordingly and the news simply is the news, good or bad. This is
something to keep in mind, because this pattern repeats itself in the lead
up to every Fed meeting.
I’m
not sure how many rate cuts the market can absorb as “good news” before the
reality of the implication set in. Five percent is often considered the
magic number – so we may be able to squeeze out one more cut and have it
make a positive impact. It all depends where we are in the channel when
that happens.
All
this leads us to the decision tree. I see the most probable scenario is the
S&P pushing to 1530 and topping there as a fed rate cut becomes apparent –
in which case find a nice green day and sell strength. As long as we don’t
get pounded by bad news early in the week, the trend should at least push to
this level.
On the other hand, we have
the jobs report on Friday and if things do not go well early in the week, we
could get whipped around fairly hard. In this case it may be prudent to
step to the side and wait for the jobs report to slide by before slipping
back into the market in time for the Fed. This could be a two IFT week for
me that looks something like this
- out on Wednesday back in on Friday. This is
based on an assumption that the jobs report is not going to come in so hot
–because we saw a larger-then-expectation increase in the unemployment stats
last week and the weaker-then-expected consumer income and spending
reports. I’m kind of getting the vibe that holiday employment is taking a
beating due to internet sales – this has been a trend the last few years and
it sounds like that may be what is happening again – more volume, less sales
(folks checking out the merchandise in person – but go home to buy). After
the last correction, we had some vibration around these levels (circled in
red) and I won’t be surprised if we get a repeat.
Overall, I expect some whip
and sideways motion but nothing too scary. Keep an eye on the RSI, MACD and
Slo Stochastic for the S&P 500. If they stay bullish, we should be ok but
if they level off, we need to be attentive.
I hope
everyone has a profitable week!
Griffin
