This Week Crucial to Investor Emotion

Though I'm currently being taught that many scholars and businesspeople believe that stock market prices represent the entirety of all available information, I disagree. I see the stock market as a much less rational creature; along with true facts and information, fear, emotion, rumors, and expectations share responsibility for driving prices and creating price swings.

The major markets (S&P 500, Dow, NASDAQ, and most international markets too) have endured wild fluctuations over the past year and a half as they shed 50% of their value. Below is a chart of the S&P 500 over just the past six months, after the index had already lost a significant portion of its value.


After establishing a new multi-year low late last week, the S&P 500 had a spectacular rebound, rising roughly 80 points - adding more than 10% to the index's value.

I was on spring break this past week, which allowed me to waste plenty of time lounging around watching CNBC. While I don't take too much from that channel to heart, watching the various personalities, traders, and interviewees provides a good sense of sentiment on the street. At the end of the week, the depressing fog certainly seemed to be clearing and some people seemed downright cheerful. A few actually resented the steep rise as they had hoped to initiate some long positions at better prices.

The week was kind to the general markets, but certain beaten-up stocks did even more exceptionally well. GE bottomed at $5.87 last week, but recovered to nearly $10 by Friday's close. General Motors (GM) more than doubled from an intraday low of $1.27 last week to close at $2.72 on Friday. PNC, a bank of national (and moreso local, due to my Pittsburgh roots) significance, began the week under $18 and closed at $28.

Last week's rally may have been caused by any different number of factors. Some scary unknowns became known; both GE and Berkshire lost their AAA ratings, but credit outlooks were reset to stable, allowing investors to feel a little relieved and reassured. Mark-to-market rules are under review, and any suspension or alteration of them would likely lead to writeups and increased capital cushions at virtually every financial institution. Other commentators think that some sidelined money may have flowed into the market, and after the gains began early in the week, additional investors threw even more tinder on the financial fire.

Some people are less optimistic. Considering the depressed, pathetic pre-rally prices of stocks like GE, GM, and many others, some people argue that much of the reason for the rally this week was short covering.

No matter the reason for what is now history, the market action this week may stifle and reverse, or enhance, the movements of this past week. The S&P 500 now sits at approximately its November low; it may not be able to cross that resistance level, but if it does, it should have a new level of support. (Note: I'm not a technician and I don't believe too deeply in technical trading, but because enough investors do, it sort of becomes a self-fulfilling prophecy).

Disregarding any technical indicators, simple emotional sentiment is hinging on the first few trading days of this week. After a 10% gain, many people want to believe that the market has turned a corner; they may be willing to commit more capital or cover any outstanding shorts if they see a little more proof that the markets will continue skyward. On the contrary, the good feelings of this week will be forgotten if markets stutter early in the week, as investors are inches away from writing off any gains as a bear-market rally in a formerly-undersold market.

Various nuggets of news will likely drive sentiment this week. FedEx (FDX) reports earnings, and they are often considered to represent the general economic environment; a positive report will reassure jittery investors, while a bleak one may estinguish existing goodwill. Nike (NKE) and Oracle (ORCL) also report earnings, while GE will provide some information about their financing arm. A spattering of other economic news and company reports will augment the aforementioned ones.

I don't have any fresh capital to invest at this point, but I'm eager to see how the markets will move. On one hand, I too share the opinion that I don't want things to go up too far, too fast - I'd like to buy some good companies at the current firesale prices! However, I think many stocks are currently oversold, and an extention of last week's rally doesn't seem irrational to me. Only time will tell...




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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%
• Baidu.com 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.