Top Line: The market made an attempt to go down on Friday but failed to break the lows from two days earlier. The most important point about Friday's trading is that the market held its lows and we expect another rally. This gives the Dow one more chance to get over 13,000. When we saw the market rally to 12,950 we thought that might be the chance we were thinking about, the one about the Dow getting some resistance in the 13,000 to 13,200 range. Right now we think the Dow has a bit of rally in it but the next rally will be a little move. There isn't much room for it to go up.
2008 Part Two
The stock market has shown us a high that should stay in place for a long time. In the October to early November period, aall the major indexes pushed to new highs or relative new highs. Since then we have seen a pull back in all of them, well, except the HUI, our favorite gold mining index. There is one index that has another story, too.
The Russell 2000 index, a leader in this market over the past several years, failed to make a new high in the October/November period. This index has dropped nearly 20% since its highs from last summer. The Russell 2000 is a small cap index, one that provides a good representation for the small investors. The stocks in this index have provided a lot of upward movement over the past several years and now they are tired out. This is a good indication that the market is headed down.
Stocks have tried to ignore all of the credit problems. Part of the reason for this is that the oil stocks have proceeded much higher along with the price of oil. Here again, oil should be near its top and $100 should put a lid on it or somewhat higher prices will curb its upward move.
The news over the past few days has given some assurance to the bulls that the mortgage problems are behind us. The news from the Fed is that they are willing to lower rates in "substantive additional action". To us, this means one thing, that the Fed will lower rates at least 50 bps at their January meeting. They are not afraid of the consequences of lower rates, they are simply concerned that the market is signalling a downturn in the economy.
The Bank of America did rescue Counrtywide, or as some call it Country Fried. The other rumor was that one more mortgage bank would be helped out. JP Morgan was rumored to be ready to step in to take over Washington Mutual.
All three of these items are part of the great effort to paper over the problem one more time. The stock market is a result of the attitudes of the many people who own stocks. The people need to be confident for the stock market to stay up, or not move down. This process has already turned down with the unemployment rate going up and the housing market not doing too well. The consumer confidence figures are low based on the what is going on.
The market has no reason to go up in 2008. We think the top of the Dow in 2008 has already been seen. We were hoping to see a bit of a rally going into the first week of the year which is when we were hoping to make that statement. There are possible ways for the market to go up but we think the next moves by the banks or the Fed will not be very well received. The Fed will decide to lower rates several times this year but the market will not react the way they think it should.
There will be some opportunities for upside but they should be from much lower levels. We think the stock market will end the year 2008 with prices lower than where we started the year. You???
FSI: 95.72 (holding above its November lows)