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Thursday, January 10, 2008

Markets bounce -- is it for real?

Markets have been up two days in a row now. The charts show that we are bouncing off a support level. Are the fundamentals in place to support a real rally? Or will we end up with another lower high?

It sometimes helps me to create a list of recent news items and try to interpret their impact on the markets and their meaning in terms of the economy. I look to see whether the evaluation changes anything in my current outlook or investment strategy. Does positive news outweigh negative news? Is the sun about to shine on the markets?

Herewith is a selection of recent news items I've been thinking about.
  • WalMart reported an increase in same-store-sales but most other retailers didn't. Is this an indication that consumer spending is slowing down? That consumers can only afford to shop at bargain retailers?
  • The Consumer Electronics Show has been going on in Las Vegas. It has been a complete bore. There are no killer applications or products in sight. What does this say about the health of the tech sector? Can MacWorld save tech all by itself?
  • AT&T's CEO commented that the company has seen an increase in consumers who have had their service terminated due to non-payment. This worries me for two reasons. First, it is surprising to hear that people are losing phone service. This is basic stuff that is typically last to go when consumers are cutting back. Second, it was surprising to see the markets react so negatively to comments that a small percentage of a huge company's customers were in financial trouble. It shows how skittish investors are at the moment.
  • Merrill and Citi are begging for dollars again. It is said they chasing more sovereign wealth funds. They must have a ton of bad news that they are about to dump on investors.
  • Weekly jobless claims were down. This is good news but the market shrugged it off because it didn't have much impact on the moving averages. Skittish investors again.
  • The market was up yesterday but breadth was not good and new lows continued to swamp new highs. Was yesterday just an oversold bounce? The beginning of that bounce off the support level?
  • Today Capital One provided guidance indicating the consumer is having problems paying credit card bills and auto loans. The company is raising reserves and forecasting diminished profits. Another indication the consumer is no longer going to prop up the economy?
  • Goldman Sachs lowered earnings estimates on a slew of financial companies. With the SPDR Financial ETF (XLF) already nearly 30% off its highs, I thought maybe we were getting somewhere near the bottom for financials. Maybe not...
  • The market jumped today on news that Bank of America may buy Countrywide Financial. BofA is already a major investor in the struggling lender that has been the subject of bankruptcy rumors. Should this be significant enough to trigger a rally?
  • The market spiked at midday and then fell back on hearing Bernanke say more interest rate cuts would be provided as needed. As if that wasn't a foregone conclusion.
  • After all the ups and downs, the market closed up today. Breadth was decent on the NYSE but not particularly inspiring on the NASDAQ. New lows continue to swamp new highs. A continuation of yesterday's bounce? It doesn't seem like the bounce is on very firm footing but we are oversold and at support, after all...
  • I would be remiss if I didn't mention a couple of pieces of clearly positive company news. Both DuPont and Alcoa reported excellent earnings and provided positive forward guidance.
Well, evaluating recent events doesn't do a lot to give me confidence that the markets are actually in true rally mode. Simply put, the news still makes me nervous.

In the meantime, though, we will no doubt see the major averages moving up for a while. As mentioned above, we are oversold and bouncing off a support level. We are bound to get an interest rate cut soon. Earnings season is starting. All we can do is stay alert and be ready to act as necessary.

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