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Wednesday, September 22, 2004
Market Recap
I mentioned in yesterday's commentary that stocks do not normally go up when interest rates are on the rise. Yesterday's up tick after the fed decision was a major surprise, but reality set in today with most investors. They realized what we already knew - the market should not be going up if rates are going up - so they began selling in a hurry. The Dow had a triple digit loss, down a whopping -135 points, the NASDAQ lost -35 points, and the S&P fell -15 points. So much for the charts that were looking good yesterday. This delayed reaction to the fed decision has closed the Dow below its 50 SMA; it is now below both its 50 and 200 SMA's.
Surveying the Damage
I mentioned that the Dow's chart had looked the weakest of the three big indices in recent days. The sell off today was on above average volume so it may be more than just a shakeout. The NASDAQ chart was looking good until today. Now it is down below the base that was forming, and it will probably re-test its 50 SMA around 1856 before long. The S&P also fell below its base and closed below its 200 SMA. This is not good news for the bulls including myself that have been optimistic about a pre-election rally.
Charts of many stocks that had been basing and building decent formations broke down below those bases today. Stocks that had been breaking out failed and fell back into their bases today. Today's sell off has damaged many charts, and I am leaning towards a cash position again at least until the smoke clears.
Oil leapt above $48 per barrel today. Normally when oil prices rise, stock prices will go down, and this could be one of the reasons for today's big sell off. This has not been the case in recent weeks. There have also been some additional tech downgrades including CSCO and a couple other companies guiding lower on their conference calls that may have contributed to this sell off.
Variable Rate Effect
With interest rates on the rise, those who have variable mortgages on their homes are paying more for their mortgage. Those that took the variable loan when rates were low had an advantage over fixed rates, but now that rates are going up, they could soon be paying more than those with a low fixed rate. The variable rate loan with low interest rates also allowed them to borrow more money and buy a larger home. The long term impact of a weak volume stock market is evidence that buyers are now investing less money in order to pay down an ever increasing mortgage bill. With interest rates rising, those monthly mortgage payments are also rising for anyone with a variable rate mortgage. Until they lock in a new fixed rate loan, those bills will continue to go up with each rate increase. A higher mortgage means less money to invest, and less money coming into the market overall.
One of our predictions from yesterday's commentary is already starting to happen. The article in this link http://money.cnn.com/2004/09/21/pf/autos/bc.autos....
that I did not see until today states that GM is upping their incentives to the best they have ever offered. I suspect the other major manufacturers will announce similar incentives. The article says that Ford has no current plans to match GM's offers but do not be surprised if in a few weeks they announce increased incentive plans of their own.
Market Outlook
After today's disappointing market action, I will be watching the direction of the markets closely and likewise at the stocks on our watch list. I am still holding out for a rally as we enter the last quarter of the year, but with today's chart damage, it does not look like a rally will start anytime soon. I want to be wrong about this so let's hope for the bulls' sake that I am.
OTC BB Watch List
- PWLX
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