Sunday March 18, 2007

Consolidation

Consolidation is my new market buzz word, with the S&P's being down about 1 point over the past two weeks. What does it mean? It means the Fed stepped in and supported the market with some of their friends, the collective "them" that you will hear those of us at Shadowtraders speak about from time to time. Why do I think this? I think this because the news last week was god awful. There were too many headlines about subprime lending woes to count. Last week there was a warning from one of the nation's largest lenders, Countrywide, that their earnings would be hurt by the subprime disaster. There was this headline on Tues. :

CHICAGO (MarketWatch) -- Many more U.S. homeowners were unable to keep up with their mortgage payments in the fourth quarter, the Mortgage Bankers Association said Tuesday, with the rate of homes entering the foreclosure process hitting a record 0.54% and the delinquency rate on U.S. home loans leaping to 4.95% from 4.67% three months earlier.
As I am writing this there is a headline streaming on Bloomberg that says the Fed may have to Cut rates aggresively by year end. In the options market there was a 0% probability for a rate cut this year, 2 weeks ago, last week the options priced in a 24% chance the Fed will cut rates 3 times, that is a big leap and there is no better a predictor of "them " activity than the options market. The options are where the big boys go for protection first.

It is quite interesting that after the sharp selloff 3 weeks ago the best we could do to recover is a 1 point loss over the past 2 weeks. This means to me that we are in a consolidation phase and we will most likely move lower because we have had a fundamental shift in the marketplace. Americans are having difficulty paying for their homes. I saw one quip that read, a senator was considering a bill to make it impossible to foreclose on an American citizen. How will that affect business?
Watch the 1400 level this week, I think it is very significant. Anytime we are below it and having trouble bouncing up through it, it is probably a good short. If we are above it we can rally 10 points, so be careful.

Highlight of the week is the FOMC meeting Mar. 20-21, they will probably do nothing but imply in some way rate cuts may happen at some point, if this occurs you could se a rally. Don't be afraid to take profits from being long after the meeting, quickly. Why? Because initially on the rate cut comments the market will rally, but then you could get a snap back down if the market thinks the Fed is getting desperate and their desperation is evidence this economy is in trouble.

We are currently seeing strength from overseas markets and from a proposed deal for Barclay's to buy ABN Amro for 10 billion, this should boost the markets temporairily.

Shadowtrader's Fear Factors:

1. VIX-16.79%, a couple points higher this week

2.Treasury options volatility up to 7.4%, .4% higher than last week

3. Housing- this remains the same, terrible, see above

4. Things cooling off here, with the Asian markets pretty strong right now, Nikkei up 130 points
5. Inflation- many commodities at multi-year highs including energies, metals and grains to name a few.

Shadowtrader's Fear Factor = 6
Only because of the current strength of the overseas markets and proposed deal between Barclay's and ABN.