Friday, January 4, 2008

Market Weakness


Weak jobs report this morning (only 18,000 new jobs and unemployment climbed to 5%). This news sent stocks tumbling today. As of this writing the Dow is down 164 points (down 200 earlier this morning).

This will be an interesting test to whether the theories of the "efficient market hypothesis" or "technical analysis" is true. In the efficient market hypothesis, the market reacts to new news, as all of the available information at any point in time accounts for prices in equities. Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends.

Here is an example chart taken from Decisionpoint.com. As you can clearly see from the chart above, the long-term support line is right at 1425 on the S&P. As I write this, the S&P is at 1423. If we break below that line, we will have technical breakdown, and this could mean bad news ahead for stocks. If, however, the technical analysts are correct, we should hold this area, as this line should serve as support.

I think the market will trade sideways for the next few weeks, and then I am bullish for the intermediate to long-term for the following reasons:

1. Sentiment is overall bearish
2. Options activity as witnessed by John Najarian suggests a possible rally in financials that will start in next 2 weeks
3. We still haven't broken long-term support line
4. Fed is an active participant and will likely cut interest rates by 50 basis points at next FOMC meeting
5. 8 straight months of net mutual funds withdrawals- this is a bullish indicator
6. The volatility is at 23 (down from 32 at peak a few weeks ago) but up in last few days
7. Current valuation of the S&P is at a PE of 13.8. This PE was present at the nadir of the bear market in 2002, thus stocks are currently CHEAP.
8. My boy Sanjoy Ghose (www.predictableinvesting.com) has a long-term buy signal based on 4 indicators
INDICATORS: STATUS
1. Treasury Yield Slope (%) = +1.38
+
2. Fwd PE Ratio = 15.99 +
3. Put/Call Ratio (PCR) = 0.96 +
4. Real GDP (Annual % growth) = 4.9 +
5. Core CPI (Annual % growth) = 2.3 +
LTTS Signal BUY

1 comment:

Bob said...

Is sideways the new term for DOWN?!?!