Monday, December 1, 2008

What a difference a day makes.

The movement up last week in the markets was a wonderful Thanksgiving gift. Monday rolled around, we had another turkey on our plate, and this one was RAW. The markets had one of the worst performance days in a long time. At the end of the day this is how things stood:

Dow Jones down 680 points -7.70% for the day and down -40% year-to-date

S&P 500 down 80 points -8.03% for the day and down -44% year-to-date

NASDAQ down 137 points -8.95% for the day and down -48% year-to-date

So, you may be asking yourself what changed in one day to make this happen? Most people do not realize that with the close of last Friday all three American stock markets were up 20% or more off their most recent bottom. When you have a run like this, it is normal to expect people to take whatever profits they can if any. While today was not normal the markets the last three months haven't been normal either.

One other factor comes into play at year-end; that is, tax selling as it used to be known. In the past people sold to realize a gain. They were selling to gain a favorable tax rate namely; capital gains taxes, which are lower than ordinary income taxes. Based on what we have heard from the president-elect capital gains tax rates may be higher next year, therefore, if you had a gain you might want to take it this year.

I think there was another factor in the selling today. Those people who saw some price recovery in the value of a stock, sold today, not to take a gain, but to reduce their losses. If a week ago Friday let's say XYZ was selling for $20. Let's also say that you had a cost basis of $30. If last Friday XYZ was at $25, you were only down $5. If you looked at the futures this morning and saw that the indication was for a sharp sell off you might have sold to protect your money.

I expect that the markets still have a little way to go before we stabilize again and try to move higher. The biggest concern this week will be the employment data on Friday morning. As of today, the estimates are for 300,000 additional jobs to be lost this month and the unemployment rate to climb to 6.7%. I think the number of jobs lost might be low and I think that the unemployment rate will be higher than 6.7%. Some of the sell off we saw today was anticipation of bad numbers on Friday. While I think the numbers could be worse that the consensus forecast, there is a part of me that thinks there is a slim chance that the numbers could come in better than expected.

I do believe that some people think the numbers are closer to 500,000 lost jobs and 8% unemployment. If the numbers come in line or a little better than expected I would look for a rally that could start on Friday and carry us into next week. One of the technicals that I look at is the absolute value of the S&P 500. We have tried several times to break and stay above 900 on the S&P. If we could break and hold above 900 on the S&P 500 we could have a nice Santa Claus Rally.

Dan Perkins

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