Thursday, December 07, 2006

Market Wants to Go Down

The market got off to a big start with the Dow moving up 50 points very quickly.  The news was that the Dow was in record territory.  As the morning wore on, those headlines changed to Dow flirts with record and by the end of the day there were no records to be made on this Thursday.  The Dow was down but only 30 points.  The real story is in the way the market responded to that early morning spurt.  

The market could not hold those gains and never did recover them.  We have said the market has felt like it needs one more pop and then we might have a good pullback.  Could it be that Thursday’s action was that pop?  We’re not the only one’s who know that the jobs’ report is coming out on Friday so there was some talk on Thursday that the market was showing restraint ahead of that number.

The other headline on CNN Money was “The Fed That Cried Wolf”.  We normally are concerned when the mainstream media starts writing the way we do but maybe the tide has turned.  There are just too many data points that show the Fed is out of touch with the economy and the market.  

We said several months ago that the Fed has lost its ability to control the markets.  As soon as they said they would pause, they gave it up and now they are impotent.  The ONLY thing they can do to get it back is to Raise rates next week and we say they Can Not and Will Not do that.  The market decides what the rates should be and the market says that rates will fall during the course of the next year.  

We are putting off the discussion of what the market will do in the coming days so let’s get to our crystal ball.  The way the market fell away on Thursday morning, it seems that the only thing that could have done that is a real exhaustion in the buying power.  Just for kicks let’s think about what the number could be on Friday.

If the number is over the 110K by any substantial amount, we have to believe that the market would wonder what to do, healthier economy but more likelihood of a Fed rate increase (this can not be what happens).  If we get a Goldilocks type number, then the market can breathe a sigh of relief but we don’t think there would be a compelling reason to buy.  If the number comes in substantially below 110K (this should not happen because these are government numbers and they can’t be scaring the public or the world), the market may find itself with another conundrum:  The Fed won’t raise (but they know that already) and the economy is weaker than the Fed is telling us.  

Whatever the number is, the market will view that number as something that will give the Fed the impetus to do something other than keep rates flat—like we think they have to do.  So, we think the market has to figure out that the Fed is not going to be able to save them and all of a sudden there will be some lights coming on with traders.  This can not be a good thing from our perspective.

We here at the Update are hoping for a weak jobs’ number so we can get a bond market bounce so we can sell at least some of the bonds we hold.  We have been patiently sitting on some cash and some bonds in order to take advantage of the next down move in stocks.  Our opportunity may well be upon us.

Dow Industrials:  12,278.41  -30.84
VIX: 12.67
QQQQ:  43.70
RYVNX:   17.35
RYAIX:  21.73
RYCWX:  36.37
TLT:  90.90
BEGBX:  14.35.

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