Shadowtrader's Market Recap Week of March5-9, 2007

Stocks rebounded by a little over 1% this week, leaving the 2 week total down a little over 3%.
Not much good news this week but probably just a bounce from the lows of the previous week. I saw a lot of opinion based news out there trying to push the market higher, that is why I believe the correction may not yet be over. Whenever there is alot of opinion it means "they" are trying to push prices higher to draw more blood from the little guys before taking it down again. The recent rally to the highs that began last fall was based on the idea the FED would have to cut rates this year and some actually decent earnings, but alot based on rates. The correction 2 weeks ago began with the Asian markets and talk of loan defaults(subrime loans) causing recession. During the pullback bonds rallied because the money came out of the stock market and flooded into safer bonds. Last week was the first time treasuries fell in 6 weeks, again showing, "they were about 1 month ahead of the little guys. This is significant however, because it shows the FED may not cut this year. So, you see, there is a problem with subprime loans and no rate cut and the issue with asian markets. This sounds to me like the market requires more than a 3.3% downswing, so I don't think the correction is over. This, on Bloomberg, gives you an idea of how the Fed feels about the economy:

Subprime Defaults Are `Beginning of Wave,' Bies Says

By Alison Vekshin and Anthony Massucci
March 9 (Bloomberg) -- The nation's banks are just beginning to feel the pain of defaults on risky mortgages they made at low introductory rates when housing prices were soaring, U.S. Federal Reserve Governor Susan Bies said.
Bies, who has been the Fed's top banking policy official in her tenure at the U.S. central bank, said today banks are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments.

Diane Swonk of Mesirow, says the Fed may have to tighten, that is real bad for stocks. Gas prices are high , so is gold and so are grains, all inflationary which is what the Fed looks at to tighten.

There will be increased market volatility because of the following Shadowtrader's, "Fear Factors":

1. VIX, Stock market volatility index- 14.09, 52 week range 9.39-23.81
2. Treasury options volatiliity down to 7% off it's highs but still 40% above the lows
3. Fed-loan default, less of a chance of rate cut and whisperings of a tightening
4. Global Risk- Talk of China selling US treasuries and diversifying could cause significantly higher rates and weakness of Asian mkts.
5. Housing Market- Very weak, recent new home sales were dowm 16.6%- the worst in 13 years, and that figure does not include condos.
6. Inflation Outlook- Grains, Metals, Energies- all at multi year highs, if rates start going higher as well-LOOK out!

FEAR FACTOR- 6
scale of 1-10

So, don't trade against a downtrend and look for down trend trades.
George Fushi
Shadowtraders.com