Unstable Market in Uncertain TimesAugust 30, 2007
During the last six weeks the market as measured by the Dow Jones Average, has had an approximate 1,400 swing. This was coupled with several hundred point moves on a few days.
As the Dow approached the 14,000 level in mid July warning signs were already present. Among these were the housing slowdown, the sub prime debacle and investors’ worries that the Federal Reserve was not on top of theses problems. These were the factors together with their worrisome result (a possible recession) had contributed to the roller coaster ride.
In mid August the market received a boost when the Federal Reserve lowered the discount rate (the rate it charges to lend to member banks). This reduced investors’ fears of a liquidity crunch, at least for awhile. The credit markets also were buoyed by the two billion dollar fusion/infusion/cash infusion by Bank of America into the troubled mortgage lender Countrywide Financial. But the good news was quickly forgotten when BNP Paribas stopped withdrawals from three of it’s hedge funds.
In spite of other good financial news during the month such as stronger than expected sales of new homes and solid big ticket factory orders, the market was still struggling for support and the volatility mostly on the downside (except for 8/29) has continued.
This volatility may be ascribed to anything from traders being away on vacation (so fewer bodies to provide bids and offers) to the unknown problems, which could surface down the road concerning the sub prime and credit markets.
The market does not like uncertainty not the unknown. Most often at best it treads water and at worst continues a downward move. This is what I feel is in store for investors until the above mess is known and quantified.
In my last letter we said the market should test the 12,850 level which it did. I believe we need another successful test of the lows to commit further funds.
Bullish Bearish Number: 70
Tough times never last but tough people do. Dr. Robert Schuller