While I was totally out of it on Monday and Tuesday of this week because of the surgery, I began to focus somewhat on what was going on Wednesday. As a result of the August significant correction I had suggested in previous posts, that we had to go back and test the previous lows to confirm the strength in the market (the Bull Market). I was very concerned and wrote to you about the fact that we had too quick a recovery in September and October from the August lows. Then we had an attempt at a second test of the August low in November and December. The year ended with the assignation of the former prime minister of Pakistan and the markets spoiled our New Years Eve and set us up to spoil the first part of 2008.
So far this year the equity markets have been scary. The number of triple digits days down has set a record. The markets tries to rally in the mornings and then finishes the day substantially down. This past Friday, because of earnings and projections from IBM and GE, the markets were up at one point about 125 points. By the end of the day the Market was off about 60 points.
The chart below shows the performance of the S&P 500 over the last 2 years. If you look carefully you will see that we have given back all of the return of last year and also part of 2005. If you committed to the market in December of 2005, as of the close of business on Friday, your return would have been about ZERO. Look at the last line on the chart, the line on the right hand side of the chart. That point is we are as of the close on Friday. If you look to the left come straight across and look for a level equal to were we are today that is December 2005. That point on the chart is major support for the market. Movement down from that point will be little steps down at a time not the major swings we have seen in the first two weeks of this year.
This slow movement in the markets is sometime referred to as a grinding down. This grind may take several weeks to several months before we have a solid bottom. I don’t want to mislead you about the bottoming process. I’m not looking this time for a quick recovery like we saw in September and October but rather a slow bases building process before we see any significant recovery.
Tuesday will be a major inflection point for the markets. If we don’t get some sort of sustained relief rally we could well breakdown to new lows for the markets.
You know that I have been concerned about the credit markets beyond the sub-prime mortgage market for some time. This past Thursday Moody’s warned one of the bond insurance companies of a possible credit downgrade. If this happens then the all of then bonds insured by this company may well also be down graded, This downgrade could effect billions of billions of dollars of tax-free bonds held by individuals and intuitions like insurance companies and may force intuitions to re-value their market value of these bonds thus causing another wave of write downs.
I realize that the stock markets performance or lack thereof in the first two weeks of this year have been scary, but I do want to point out that the “Fat Lady” has yet to sing, she is not even in the building. We are far from out of the woods.