Sunday, August 05, 2007

Big Friday Afternoon Selloff

Late Friday saw a dramatic market decline in the last two hours of trading. The Dow was essentially even on the day with two hours to go and then we saw a 280 point selloff going into the close. You probably already know this but the question is, "What now?"

Before that, let's get into what caused the decline. The big issue is the interaction of the rating agencies and,particularly, Bear Stearns, but holders of structured credit in general. S&P lowered Bear Stearns from "stable" to "negative" indicating a possible downgrade in the near future. Bear Stearns made an announcement Friday afternoon as reported on CNN Money(Reuters): "These times are pretty significant in the fixed-income market," CFO Sam Molinaro said on a conference call with analysts. "It's been as bad as I've seen it in 22 years. The fixed-income market environment we've seen in the last eight weeks has been pretty extreme."

In concert with that remark is Jim Cramer's ranting late Friday calling for the Fed to step in and lower interest rates. You may find his comments at least entertaining, as we did, and you can find the video out on YouTube. Cramer's comments, maybe we should call them shouting, do make some sense when you see what is going on out in the credit world. Liquidity is drying up and Cramer is hollering for the Fed to loosen right now.

Well, the Fed does have a meeting this week and we will see if Cramer's rantings are addressed at the meeting. Here we are, with the world coming back to our view that the next Fed move will be a decrease in rates. Wasn't it about a month ago that all were predicting a rate increase very soon???

So, while the jobs' number was lower than expected, the market barely noticed. Late in the trading day the attention turned to the credit markets where "Armageddon" is occurring according to Cramer. The stock market participants hardly notice things like liquidity problems or credit market meltdowns but late Friday there seemed to be some recognition.

As the weekend has passed and "calmer heads" take over, the market looks like it might trade calmly, too, at least for a little while. We are in the late stages of the first wave down which may not have happened just yet. We mentioned our thought that there would be a move back up to around 13,675 and without a deeper selloff, that number may be fairly close from this point. We will continue to update that rebound amount as we get closer.

For now, the market should try to find some footing here just above 13,000 but after the next bounce we should see a fall off which will scare the bulls into selling. For this reason we don't believe this rally should be played due to the extremely dangerous position of the market. THe market is ready to sell off any time and Friday is a great example. It came from nowhere and took out 280 points in two hours. This happens to be the lowest close for the Dow on this move since the mid-July record high.

No comments: