Wednesday, January 09, 2008

At Last, A Rally

Top Line: At the moment, the market seems safe from further deterioration, for the moment. After the intraday reversal, US stocks are poised for further advance. The main question, of course, is how far can it go? Or, can it go? The market will let us know soon enough but our position will continue to be that any rally that exhibits itself will run into resistance at only slightly higher prices. Looking at the chart, the upside potential seems to have a spot that should present some problems for the rally. That level is right around 13,200.

Let's make sure to mention that the stock market does Not have to go up at all let alone back up to 13,200. What we are saying is that if the Dow goes up it should have trouble at this area. If it gets through that area, then we'll take another look. If on the other hand the market can't muster a rally and breaks down, there could immediately be a major selloff. We consider this a very low probability event.

The reason for the low probability is the market's continued faith in the Fed. We are considerably amazed that the market thinks the Fed can fix all ills by a rate cut, but it still lives. The market is now "begging" for 50 bps at the January meeting in a few weeks. Probably more to the point, the stock market thinks a lower rate will push stock prices up. That has not been what has happened with the rate cuts we have seen recently. Again, don't bother with facts.

Today's reversal was pretty impressive so now the market wants to prove itself with further gains in the next few days or a week. Our new short term target of 13,200 is not that far away and the market should run into sober sellers and significant resistance between here and there. This rally will fail and then we will see just how far the market can drop. Let's get back together tomorrow to see if there are legs on this rally.

After the close, Alcoa started the earnings parade with good news except on the transportation costs rising. We now are entering the earnings season which could be tough for most companies anywhere near the mortgage industry.

As we put the Update to bed, we notice there was some news on COF (Capital One Financial) the credit card company. The news from COF, according to the WSJ, is that their business is not producing the earnings that it said it would. Here we see the ooze from the mortgage business hitting other business.

Also, the Asian markets are down this evening which seems reasonable after the last few days that showed strong rallies. But, with the US markets showing some strength, we are surprised by the drop. As we have said, the selling pressures are strong, and that includes global markets.

We are keeping our eye on gold and the mining stocks. Gold has probably made an intermediate high just under $900. The complex is going to come under pressure now as the price of gold rolls over. We suggest that with this drop coming up, not to short the complex but to watch it with us to find a good entry point. Shorting the complex may be quite profitable but we will wait until a buying opportunity appears.

FSI: 98.70 (not exactly a big move)

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