Opening Position
May 2008
It has been one crisis after another since
the credit markets seized up in July 2007. This domino effect came to the
very edge of disaster with the recent Bear Stearns fiasco. But to the rescue
came the Federal Reserve, bailing out Wall Street's fifth-largest investment
bank through JP Morgan. So when Bear Stearns was sold to Morgan for a bargain
price -- which is still being negotiated as I write this -- there was the expected
panic with huge selloffs across the board. And at some point in afternoon
trading that selling panic ended, and you could see the buying come back into
the market.
In the days following, there was an obvious shift in sentiment. The equity
markets saw a rally; the commodity markets, which had been on a bullish rage,
started cracking; and the US dollar actually started to rally. This shift
in sentiment triggered the recitation of the word "capitulation" in the financial
media. In fact, that's all we've read about in the next couple of days. Could
it be? Was the Bear Stearns episode a signal that the stock market had finally
bottomed?
Clearly, the intervention by the Fed restored some of the confidence
that was lacking among consumers, not just to prevent investment banks from
falling over the edge of a cliff but also by drastically cutting interest
rates. But I wouldn't be making plans for that long-awaited trip to the South
Seas just yet. There's still too much uncertainty in the markets. From a purely
technical point of view, if you look at the chart of any of the broader indexes,
you'll see that they're all still in a downtrend. It's going to take more
than a couple-day rally to change that. In fact, we have seen this type of
action in the market several times since March 2007.
So how can we say with any confidence that it will be different this
time? No, we can't. We have to go back to the drawing board and analyze our
charts. And it doesn't take more than a simple moving average or trendline
to figure out where the markets need to be before we can say with complete
confidence that the downtrend is over.
Nobody wants to go through bad times in
the markets, but they are inevitable. There are still a lot of risks that
need to be addressed, such as leveraged loans. And really, if you think about
it, getting rid of all the junk and starting fresh with a clean foundation
isn't necessarily bad. Until then, it may be best to sit on the sidelines
and just watch the show.
Jayanthi Gopalakrishnan,
Editor
Originally published in the May 2008 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2008, Technical Analysis, Inc.
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