US Stock Market Ready to Fall

Before the opening on Monday, the tech stocks got an infusion from INTC who said that their revenue would be up 3% to 4% for the quarter. Huh? Are they serious? 3% is enough to call up the world and try to get the markets going. We like the timing of certain announcements like we mentioned in our last post, CFC (Countrywide Financial) announced some bad news about laying off 12,000 employees after the market closed on Friday hoping it would go unnoticed on Monday morning. Then INTC makes their announcement and the world is a happy place for a few minutes anyway. Let’s not forget the Congressional “promise” for Fannie and Freddie that we mentioned in our last post. That got a little play going into the opening, too. All in all it was an aggressively bought opening.

But, wouldn’t you know it? Right after the open the market had nowhere to go but down, so that’s what it did. The Dow opened up about 85 points and spent the next two hours dropping to test the lows of last week right around 13,050. From there, since of course the test was passed, for now, the Dow rallied until the final hour and managed to get higher than the open but just barely. The last 45 minutes pulled the Dow from being about nearly 100 points to close up just 14. The other indexes performed similarly but the action in the NASDAQ Comp was noteworthy. The Comp opened up 25 points or about 1% and then fell from the high near 2590 to below 2540, about a 50 point drop, over the next two hours.

The bulls may feel that they have won this day because there were several Fed officials talking about how next week’s FOMC meeting may not cut rates. The market didn’t pay much attention to these people as the fed funds do not even consider rates will stay at 5.25% next week. Yes, there is a 100% assumption built into rates today that the Fed will cut at least 25 bps. Plus, the market has given even more weight or probability to a 50 bps cut than a 25 bps cut. These numbers come from the credit world but the stock market is keenly interested in them. So, the stock market is pricing in at least a 25 bps cut and no Fed official could deny a rate cut on Monday with enough authority to make it seem reasonable.

For our part, this is the first time we have said that there is a possibility of a cut. We don’t have a 100% iron clad decision on this tonight but we will try to come up with one over the course of the next few days. In our last post we talked about the rate cut being determined by the traded fed funds rate. We apologize for the confusion—we meant to say that the Fed has to watch the Treasury bill rates to see what to do. That rate has been trading in the 4.6% to 5.25% range for the last year and in the last few weeks has now traded down to below 4% today. A couple of weeks ago amidst all of the subprime turmoil, it traded below 2.3% but has now been trading a range of 3.8% to 4.6% over the past week or two. This allows the Fed to drop their funds rate by 50 bps. We are going to watch this rate very closely over the next few days to get an idea what the Fed might do.

The overnight markets are fairly calm this evening and Asia is trading with a positive bias as we write this. We do think the world is about to see the US stock market get hit pretty hard. The pattern that is now developing is something we have been expecting but now it is upon us. Today’s market showed strength early and some positive buying over the course of the afternoon but looking at the breadth, it was poor. There were more decliners than advancers and the number of shares traded in up stocks was less than that of down stocks.

This is only one day but the actual pattern of trading is distinctive as well. You have seen the Dow move or we should say try to move up over the course of the last few weeks. Friday’s market shows us just what strength the Dow has, not much. Today’s early strength was greeted with selling and the midday rally was met with a late day selloff. These two items are strong indications of what is going on underneath the covers. There is weakness and we are going to see it manifested in Prices very soon if not Tuesday, then Wednesday. Let’s watch very carefully.