Summary for Week Ending 28th July 2007
The two weeks since we last spoke has seen more than enough action to last a lifetime. In the week prior, essentially nothing happened and this was the calm before the storm. The daliance with the old high from 2000 was just that.. a passing interest but nothing with intent behind it. The ongoing drama linked to the housing market and the CDO submarket is being blamed for the rout, but I cant really see the connection. Perhaps there may be some effect on a specific sector but the market as a whole .. I don't think so. So does this mean that its all over done ? Lets look a little closer.
The only effect of the CDO stuff up may be that the FED could drop rates a little in an attempt to stem the flow of blood by the little guy who got overextended. Of course a drop in rates would have a flow over effect to other things like the currency, something which is already weakened, and a further weakening in this area would have capital flight to stronger ( high rate) currencies which could create a death spiral as this behaviour would feed upon itself. The FED has very few weapons in its armory to do anything about this. Dropping rates can also have a blowtorch effect on the economy pushing it into overdrive, again an unwanted result. It all looks like fun. The best outcome would be to do nothing and let the silly folk who took a bad bet ..die off. By taking a darwinian approach means that the recovery will be swifter, albeit with the dross no longer on the playing field. If you doubt the effectiveness of the scorched earth approach just look at what happened in Japan 15+ years ago. A failure to accept the fact that things were stuffed saw the economy simply drag along because the financial institutions were burdened with mountains of crappy debt. A scorched earth approach would have allowed for a massive writedown, and a lot a carnage, but the leftovers would have been in a position to move forward strongly! But who wants to be brave these days.
Looking closer at what's been happening in the S&P we can see that we had a helluva slump last week, with the appearance of the promise for more. Looking at the chart we can see we are on the 135 day line so there is promise for a bounce here. Also we are at the 97 point level, which is the best we have seen for a decline in some while and we are at/near the first line of support. bearing all of this in mind, we have a lot going for us to expect a bounce of some description. If we do see a bounce then this would set things up for a run to the 180 day market for a final top for the year. We have seen what happens when we hit the old high level, and this slump should be enough. If the market does recover strongly from this there are also some deep psychological impacts that need to be addressed, but I'll look at those next week if indeed we do see the market climbing out of the hole its just dug for itself. Teh old 107 point decline level is still in play. If we see this breeched, then all bets are off.
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