SUMMARY OF STOCK MARKET 101 ANALYSIS:
Stock Markets are cyclical in nature. A great deal of effort has been put forward to timing the start and end of bull and bear markets and market corrections. After review of almost every correction of the Dow index corrections since 1928 a distinct pattern developed, the indexes fairly consistently rose above the moving averages and fell below the moving averages. Check Stock-Market-101.com for daily updates
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SEPTEMBER 2007
The cavalry charge of "global liquidity" which buoyed the markets for so long is reminiscent of the Nasdaq charge ending in 2000 and the current charge by the chinese stock market. These bullish extremes tend to go on longer than anyone expects (hence the Greenspan speech of "irrational exuberance" in 1996 (about four years too early) and then take a long time to drain the the life out of stock prices, for example, the 89% correction of the nasdaq over 2.5 years.
Fed Cuts:
Interesting the Fed cuts are now affecting the US dollar which is going through its own major bear market(chart symbol $usd on stockcharts.com). A falling dollar has the potential to undermine the market when foreign investors see their currency loss on their next statement and decide to pull some money "off the table". For example, a canadian investor in us stocks might see the stock price appreciate, but when offset by the currency exchange he looses money. The chart below shows the bear market of the us dollar.
The 11 rate cuts during the Nasdaq 2000 collaspe didn't seem to do anything other than short term upswings before more selling took place.
Ironically, the Fed rate cuts that led to an asset price bubble in housing are the solution that market is rallying to solve the current problem. This might equate to an alcoholic fixing a drinking problem by taking another drink....makes the alcoholic feel good for a while but doesn't solve the problem.
Credit Turmoil:
The credit turmoil is reminiscent of the real estate turmoil that seems to precede it. The real estate market slow down, results in seller and buyers not reaching agreement on the value of the home. Buyers are hesitant that they are paying to much and the sellers are thinking prices always go up, so we are in a deadlock of rising inventory or default and sticky real estate prices. The same issue is following on the re-sale of the mortgage packages CDO's, and commercial paper the prices are sticky, but the buyers are hesitant.
Greenspan Greenspan states on Thursday, Sept 20th, (bloomberg) -"wealth affect, 85% of consumption spending out of income, 15% of
consumption financed by mortgage debt for consumer purchases". [Many people
were financing new toys and investments by doing another refinance. A chief
economist for Lehman Bros states we are a single engine economy, the engine
being consumer spending, ad these to pieces of information and you get
"Houston, we have a problem." - "home price issue is a global issue"..."global boom in
housing prices" in other countries the housing boom was even bigger and
more adjustable rate mortgages were used. [The real estate bubble prices have
held up quite well but the inventory has been growing and growing. The sellers
are so used to prices going up that the thought that prices might actually drop
is not something many can comprehend which leaves on the desparate home sellers
actually cutting their prices or just walking away from their home loans.] The market is on the verge of making a new all time high above 14,000 which
is just 150 points from Friday's high, even with all of the bad news looming on
the horizon. Most of the bad news screams "sell everything" which must be wrong
because to expect the markets to be rational would be an exercise in futility.
As John Maynard Keynes said "the markets can stay irrational longer than
you can stay solvent" Moves of the index below the 10 dma should be
viewed with extreme caution.
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-"large overhang of newly constructed homes" "pressure to sell
these homes" , '"as prices fall, equity buffer in homes...gets narrow,
900 billion in asset securities would be a problem". [It would seem that
new home buyers would rather purchase a new home in subdivision than a used home
priced the same in the subdivision, so a large inventory means that new homes
will start to moving first but existing home sales will lag]