(originally published on February 16, 2008)
We had reaffirmed last week that stocks were in a confirmed bear market. We also categorically stated that a pullback rally within the larger downtrend was overdue and should be used solely to lighten up on long-only exposures. Stocks played to script this week notching up modest gains despite heightened volatility that usually accompanies an options expiration week. Stocks gained sharply mid-week following Warren Buffett's bailout plan for the mono-lines and a narrower-than-expected trade deficit. But comments from Ben Bernanke and a remarkably weak consumer sentiment survey spoiled the party. The front-line indexes closed out the week with a respectable 0.5%-1.5% gain. Most indexes witnessed an 'inside week', that is in keeping with the idea of a consolidation after recent steep losses.
S&P 500 - Daily
Russell 2000 - Weekly
While our call for a rebound in global equities seems to be coming true (Asian equities managed their first weekly gain in 2008), the outlook remains largely unchanged. We view the current rebound as a mere pullback within a longer downtrend. A major sell signal on longer time frames (weekly, monthly and quarterly charts) spread across global indexes and across multiple sectors suggests tougher times ahead for equities. 1400 levels on the S&P 500 will continue to be a formidable resistance in this pullback.
We review the major economic headline this week - a drastic shift in consumer sentiment over the past few weeks that makes a recession now appear increasingly plausible. Although the Fed has dropped is benchmark Fed funds rate by 225 basis points in six months, it has had only limited success in bringing borrowing costs down for consumers and borrowers. Nevertheless, the market believes this failure is the very reason why the Fed will further reduce rates. This negative feedback loop has the Fed pushing on a string in vain. Further, the complete freeze in the relatively obscure auction-rate bond market is the latest shoe to drop in the sub-prime contagion that has now spread world-wide. We finally wrap up with Warren Buffett's keen sense of timing, that could potentially strike gold for Berkshire Hathaway amidst a pile of toxic waste.
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