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The Stimulus Package
Author: Ravi Prakash (info)
Website: http://www.optionstradinglessons.com/
Posted: January 22nd, 2008 at 7:33 am EST
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If you were short the market for the past few months, then the current situation is great for your portfolio. However, if you were long then it has been a painful couple of months. I admit I never thought it would get so bad. I am hurting this month, but I learned long time ago to take losses in stride, learn from it and then move on. Now if all the kings men really wanted to help improve the negative mood and the weak economy surely they could have come up with something more powerful and earth shattering than a $140-$150 billion aid package. That package will give people a few hundred dollars in tax cuts which is likely to get lost amid the complexity of most people’s IRS returns. In comparison to this generosity to our fellow Americans, the U.S. has spent around $315-$320 billion in Iraq for the fiscal year 2007. A war that has done nothing positive for our country, the people or our economy. Just $100 oil, a housing crash, credit crunch and higher inflation.
As of Friday all the major indices have slightly oversold short-term RSI. We also know that nothing can keep moving in the same direction forever. A bounce in the market is waiting to happen, just a matter of timing. I also see that the major indices will now have new (and lower) resistance levels to overcome. So any bounce we see might not last long. The DOW did come extremely close to the 12,000 level. This is the level I pointed out earlier should provide support for the DOW and still remain in an overall up trend. A breach of the 12,000 level could be an indication of more pain for the long term and especially the long positions.
Barring any horrible news/action in the markets, I think the Feds will just wait for their “end of month pow-wow” to drop interest rates. When I studied economics, I learned about the different things Japan and Germany did for their economy in the years following 1945. Monetary policies alone can only go so far in helping a weak economy. You also need good fiscal policies to back it up. Tax cuts for individuals will not help improve employment in the country. Somehow employment needs to be protected and whatever little manufacturing we have left. Corporations also need some economic benefit to continue employing people and expanding.
Yet as a stop gap effort an interest rate cut seems to be guaranteed at the next FOMC meeting. I think a 0.50% cut is very likely. However, a 1% drop would be far more likely to improve market sentiment. Recent earnings have not helped much and a small drop in interest rates is already “baked in” so to speak. So what event or news will stop the Market slide? Next week (a short one) will see a deluge of earnings coming out. If we see good earnings we may see the selling slow down or stop for awhile. This quarter is the perfect opportunity for all the financial institutions to come clean and declare all their losses in one go. This would allow them a clean start with less cash but a clean start all the same. They of all sectors need to regain the trust of investors and traders alike.
One last thought for the week: In an election year we are going to see all political parties trying to show their concern for the economy. If you have been reading these comments, you might be echoing my thought which was “Economics is not your strong suit.” It made me wonder what kind of government we would have if Presidents, VPs and their cabinet members all had to have an IQ over 130 and all government employees at least over 110. I think we all deserve a better informed government every once in awhile (an evil thought on my part).
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Authors, Economics, Investing, Options, Ravi Prakash
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