Sunday, January 25, 2009

Friday the 23rd was very important day.

On Friday we tested the previous low on the Dow Jones and bounced off that test to close above 8,000 on the Dow, but the Dow was down for the day about 42 points. Of greater interest to me was the fact that the S&P 500 also tested it’s most recent low and finished up for the day over one-half of one percent. The market had every reason to set a new low based on what the futures looked like before the opening.

The S&P 500 hit it’s low for the day at 9:36am, one minute after the market opened. It spent the rest of the day moving up. You can see clearly the support and move up in the chart above. The technical people say every time we sell off and test the low and the lows hold we are “Baking in a Bottom”. Nobody knows for sure how long it will take to start a move off the bottom or for that matter how many times we will test the bottom.

One thing is clear to me, every time we test and hold the bottom it is like winding a spring. At some point in time all that built up tension in the spring will eventually have to be let loose. When the market is caught up in a tighter and tighter trading range, it is only a matter of time before one of two things happen, the market breaks either out or down. The news about the economy continues to be very bad. Now everybody is focused on the next jobs report due out in about two weeks wondering how bad it will be. Citibank and Bank of America look like they could be penny stocks any day.

Most people do not seem to know that there are over 7,500 banks in the United States, but to date only 270 have applied for TARP funds. I realize that almost all of the largest banks in the country have asked for help, but we have 7,200 that have not asked for help and many of them are local community banks that are lending to people like you and me.

I am making these points to try to help you understand what is happening in the broader economy. Yes, people are loosing their jobs and some are losing their homes. The new president is going to try to figure out a plan to fix the serious problems in America. Unlike President Bush who only had four months to solve the economic problems the one advantage President Obama has is that he is not trying for a quick fix. If the President and Congress spend enough time trying to come up with the best possible solution the better the chance it will be accepted by the people. The administration and the Congress do not have a great deal of time to come up with a plan. If we think it will work then confidence will return to the economy. Taking a methodical approach to solving the problems is adding to the tension in the spring of the market. Do not be surprised that one day soon the market just explodes up on what appears to no reason.

Dan Perkins

No comments: