Top Line: With market action following our current blueprint, we think that the current setup will provide a strong down move. As we have been mentioning for a while, the 12,750 area in the Dow has been a strong resistance line. Since the test from Wednesday held, many market watchers will respect that line and that will reinforce it.
On Thursday, the market got off to a poor start with the help of several news items. The first item was the weekly jobless claims which jumped and were higher than expected. This number is unpredictable anyway but the fact that it jumped gave the recession theory some credibility.
Then came the news from Thornburg, the troubled mortgage lender, who said they were trying to make Margin calls on their investments. The key for the market was the Type of mortgage in question and in this case they were Alt-A, no these were not subprime. So, when the world had decided the subprime Problem was contained, they were Hoping that was the case. Now that Alt-A is starting to show up with problems, the stock market was not happy.
You know that the market doesn't like looking at facts that are bearish so there was another item they had to look at, the revised GDP. The market expected a bit of an improvement in the last estimate, which was 0.6%. But, while a number around 0.8% was on their minds, they got the same old 0.6%. This also provided fuel for the recession talk.
The Chairman of the Fed was still on the Hill speaking to the Senate on Thursday. The important points of his speech are concerned with interest rates and the economy. What do you think he said about lowering rates--you guessed it, he was clearly ok with lowering rates. Almost immediately the futures market pushed the probably of a 50 bps cut at their March meeting to 100% and started moving in a 75 bps cut.
The Chairman had his eye on inflationary pressures but said he wasn't really worried about it, but he did say it may make the Fed's job a little tougher. The Chairman also thought the dollar was in no danger of being displaced as the world's reserve currency--the keepers of the Euro may argue with him since it seems to be moving up every time the Chairman speaks about lowering rates.
The President got into the same pool as the Chairman of the Fed when he asserted that the economy wasn't going into a recession. Yes, he said we have had some slower Growth but the economic stimulus should help. So, we now have the Chairman of the Fed and the President of the US both telling us in loud words that we will not go into a recession. Both of them think they can mandate there will be no recession. The rest of the world is making the opposite conclusion, which is that the US IS going into a recession and may be there already.
After the market brought some bad news from both AIG and DELL. AIG says it lost over $11 billion on some of its investments and would therefore put in a losing quarter. DELL disappointed its shareholders with its after hours announcement.
We are pretty sure there was some good news out there somewhere but we couldn't find any. The market could not disregard the news on Thursday and sold off by the end of the day.
We are getting more convinced that the market is ready to spike lower and maybe that could start on Friday. The major successful test of the resistance line somewhere around 12,750 has solidified our thinking. This market is so ready to fall out of bed and the participants will hit a little fear and probably hitting sell orders as well.
The only thing we can do this evening is wait for the developments. This should be a spike down based on the technical picture. Let's sit back and watch this.