The technical outlook --
With financials already dragging the markets down, the collapse of tech has removed on of the major supports for the major averages. We now see both the Dow and the S&P 500 falling below their 200-day moving averages. We also see the 20-day moving averages just about crossing below the 50-day moving averages. This situation occurred in August and the markets recovered; unfortunately, there is no guarantee that history will repeat itself.
Especially ominous are the intra-day charts. It can often be seen these last few days that volume is heaviest on down moves. This can be observed looking at both financial and tech ETFs. This is not a good sign.
There some analysts who say the financial and economic situations are worse than in August so the market is probably heading down. There are value players saying stocks, especially financials, are getting cheap and that now might be the time to buy. As there are always two sides to every trade, there are always two ways to look at the markets. No matter which group is correct in their analysis, the charts are clearly signaling "caution."
The week coming up --
The week hasn't even started and the financial sector is raking in more bad news. Bank of America and JP Morgan Chase announced late Friday that their fourth quarters would be affected by issues surrounding exposure to CDO's. E*Trade announced an SEC investigation into its mortgage trading and that earnings would be hit by the deteriorating value of its mortgage portfolio. Rumors continue to dog Barclay's concerning their sub-prime holdings and HSBC is reported to be ready to announce another round of write-downs. Financials can't get out of their own way.
According to the New York Times, Bank of America, Citigroup and J.P. Morgan Chase have finally agreed on how to structure a fund to help stabilize the credit markets. Sounds good but will it help? To quote the Times:
"The fund's impact is unclear, however, because the debt markets have worsened, investors are shunning asset pools, and structured investment vehicles are trying to unload the securities they hold on the assumption that the new fund will not work."
Interestingly, their were no bombs dropped over the weekend concerning any tech stocks, only reports that short interest has spiked in Microsoft. Have we seen the beginning of a rotation out of tech or just another buying opportunity? Stay tuned...
As for potentially market moving economic reports, we will see the latest on producer prices and consumer prices reported on Wednesday and Thursday, respectively. October retail sales is due on Wednesday and October industrial production and capacity utilization on Friday. The September pending home sales index will be reported Tuesday. Anything that hints inflation is increasing or the economy is slowing down could potentially trigger another sell-off.
The TradeRadar Model Portfolio --
The gyrations in the markets this week caused us to hit stops in several of our holdings and encouraged us to pick up another inverse sector ETF. Details can be found on the TradeRadar Track Profit & Loss page and in the following posts: Financials tank but ultrashort ETF is up nicely and Overweight tech no longer. The titles say it all.