Sunday, November 11, 2007

A Weak Week?

Note: This is published before the markets open for the week of 11/12.

The performance of the major indexes over the past week can be viewed two different ways.

As I have said before, predicting the market is nearly impossible and (overall, for a long term investor) generally fruitless. However, when writing a blog about the stock market, it's necessary and fun.

This past week, the Dow and S&P 500 both shed about 4%, while the NASDAQ endured an 8% haircut. (The majority of these losses came on Thursday and Friday, with some of the indexes and many individual stocks actually posting gains between Monday and Wednesday).

Many of the high-flying tech stocks (that I shorted in my fantasy portfolio; read my previous post) led the market downward.
  • Google lost over 10%
  • Research in Motion dropped over 20%
  • dropped nearly $100 from its all-time high around $430 early in the week to $340 on Friday
  • Chipotle Mexican Grill, on which I stated I had a bearish outlook, lost about $20 from $140 to $120
  • Even the blue-chip Cisco lost 10% after reporting good (but not spectacular) earnings

Both the S&P 500 and Dow are both within a few percent of their mid-summer lows, with the NASDAQ a little farther away due to a bigger run-up in recent months.

Many professional analysts cite those summer lows as an important level of support. If indexes crash through those lows, look for new, much lower bottoms. But if the markets tap the barrier and bounce back, the bull market may be revitalized.

However, looking at it simply instead of technically, I see reason for weakness to persist in the markets.

Oil, though now off of its highs, is still in the mid-nineties per barrel. Gasoline and other distillate prices are now only starting to catch up to the rise of the price of oil, so watch for consumers to now finally be effected by $90+ oil.

The dollar is crashing. Though such terms haven't been used yet, and though I'm not an international monetary policy specialist, I'm comfortable using that term. After reaching parity with the dollar within just the past month or two, the Canadian dollar now trades around $1.05. When currencies are appreciating faster than markets (with 5% monthly changes of 10+% yearly changes), I think that the depreciation is becoming dire. The dollar is hitting new lows against the Euro on a daily basis. As the Fed continues to weaken the dollar through cutting rates, it's making the problem even worse.

Lastly, the subprime problem is far from resolved. Major banks and investment houses continue to write down their books for losses in securities. Major corporations like Bank of America, AIG, and Morgan Stanley are plummeting in value. Homebuilders, though recently pushed out of the spotlight, may still be in danger of going bankrupt. As the cost of imported goods starts and continues to rise, Americans won't have money to buy houses.

There are just too many logical reasons why the market could continue to go down, while there is little logic for an upside bounce. I own some puts in an ETF that tracks the S&P 500, and when they expire this week, I may buy an Ultrashort ETF. I could easily be proven wrong in the short or long term, as political, economic, corporate, and emotional conditions change, but I see no reason for the markets to immediately rebound in the context of today's environment.

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