Tuesday, August 21, 2007
What to watch: A 'crucial' week
"The last few weeks have been harrowing investors, but this week could prove crucial," notes Richard Moroney in Dow Theory Forecasts. Here's what you should watch for.
"The Dow Industrials has fallen more than 8% from the July 19 high of 14,000. The economically sensitive Transports are down even more sharply. But the next week or so is critical to watch for to determine the market's future direction, for three reasons:
"First, most corrections retrace one-third to two-thirds of the last advance. In 20 trading days, the Industrials lost more than 59% of the 1,950-point advance of the previous four months. At this point, we would expect to see some downside support - if indeed the Average is going to recover to set a new high.
"Second, last Thursday, Aug. 16, the market declined sharply for much of the day before surging at the end of the session, a jolt of investor optimism the like of which has not been seen in some time.
"Third, the market reacted strongly early Friday, Aug. 17, when the Federal Reserve cut the discount rate by 0.5% to 5.75%, citing an increase in 'downside risks' to the economy. However, the Fed did not cut the federal funds rate, which is normally pegged at 1% below the discount rate but now remains at 5.25%.
"Stocks lost ground after the initial surge on Friday, and it is uncertain whether the Fed’s unusual action will have a lasting effect.
"We may have reached an inflection point. If the market trends upward over the next week, it would suggest that investors have begun to gain the confidence necessary to spark a rally. If the market shakes off the recent strength and trends downward, it could be a sign that more panic selling is before us.
"For now, we consider the current market action to be a correction within a bull market. Hold on to your hats - and hold 5% to 10% of your equity portfolios in cash or a short-term bond fund."
posted at 3:08 PM
