Uncertainty Reigns — Stay Cautious
These are crazy times for investors and traders. Case in point: after eight straight days of losses, markets were extremely oversold and jumped over 11% on Monday in a stellar up day.
What astounds me is the scope of the intraday volatility and extreme swings in trading, which clearly continue to indicate the fear in the market and persistent uncertainty. Recently trading at five-year lows and trending lower, the spike on Monday was positive, but it is only a one-day event and not a trend, which is something we want to see. The reality is that the market cannot seem to fully shake off the concerns regarding the credit market and the feeling the economy could be heading for a crash. News is bad across the board.
Consumers are not spending and the housing sector continues to see rising foreclosures, as home prices fall below what mortgages are carried on the books. The fear is that the degree of the selling capitulation that we have been seeing. Despite the concerted global efforts to make credit flow easier via interest-rate cuts and offering loans, we still sense there could be more major problems surfacing in the near future and this could cap gains. Given the risk, we expect the negative selling bias to continue regardless of the oversold condition.
In Europe, there is also chaos. The Russian exchange fell 20% in one day and trading was suspended in some exchanges, which indicates the magnitude of the current fear.
In the commodities market, metals are taking a pounding due to the economic fears. Oil continues to decline on concerns regarding global economic growth and is well below $90.00. OPEC is set to have an emergency meeting to discuss production cuts to boost prices. Talk about greed; especially during these troubled times when we don’t need to worry about oil prices. Gold is approaching $1,000 an ounce, as investors flock to the safe haven of holding gold.
Unlike the crash in 1987 or the market meltdown in 2000, this current market is different. Interest rates are low, but what are different is the extremely weak subprime and real estate markets and the credit squeeze in financial companies. The fact is that, as debt financing becomes more difficult, many smaller companies,especially those in the early stages of development such as resources or technology, may face an upcoming credit crunch that could drive the share price down more.
The uncertainties out there are valid and make 2009 likely to be filled with uncertainty. The recent decline of the DOW to below 8,000 and Monday’s bounce to above 9,000 may indicate a near- term bottom, but only time will tell if this is true.