Monday, August 27, 2007

Monday Morning Musings

The market opened without much fanfare this morning, and more profit taking than anything. The S&P 500 and Nasdaq had their best weekly performances since March last week, so some profit taking in the short-term would be normal.

Home Depot (HD) agreed to sell its supply business, but the price tag is less than originally announced. This has some investors worried that the estimates $400 billion in pending deals could be subject to renegotiations.

Asian markets closed higher across the board overnight, with China hitting another record. Oil is trading lower this morning, near $70. And bond yields are steady with the 10-year around 4.61%.

Now that we have had the bounce, many people will be looking for some sort of retest of the recent lows. The bears think we will break down to even lower lows. With so many looking for this sort of market action, I have tempered my earlier views of a retest.

I still think we will get a modest pullback, but I don't think it will test the lows. I believe the fact that the Fed has started to lower rates and inject liquidity will help. I also think that the rush to buy bearish put options and downside protection will help put a bid under the market.

If the markets do not go back to new lows, it could unleash waves of short-covering that quickly take the market back to its former highs. Technically, there is plenty of overhead resistance created by the recent correction. The NDX is the only index close to testing its overhead 50-day. So this process should take some time. No need to place all your bets today.


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