Sit Tight — the Downward Slide May Not Be Over

It continues to be a bad beginning to 2008 and, based on what is referred to as the “January Barometer” in the “Stock Trader’s Almanac,” a bad January may indicate a down year for stocks. Stock markets continued to decline on Tuesday, as the DOW lost another 1.86% and is down over five percent in 2008. Even worse, the selling has focused on the technology and small-cap stocks, with the NASDAQ and Russell 2000 both down eight percent in the second week of trading.

The problems at hand continue to be the credit and housing markets, along with concern of a recession or slowdown this year. Merrill Lynch has already said that the U.S. economy is in a recession at this time, driven by the weak housing market. If this is correct, it could be a tough year for stocks and it would be wise for you to be prudent in your investment and trading decisions.

Yesterday, I talked about the situation with KB Home (NYSE/KBH), a major homebuilder, which reported a wider-than- expected loss in the fourth quarter due to the soft housing market. Subsequent to this, speculation surfaced that Countrywide Financial Corporation (NYSE/CFC), the largest mortgage lender in the United States, was possibly near bankruptcy, albeit it was not confirmed. Countrywide offered a poor outlook for the housing industry, while the Bush administration also said that it was concerned with the increasing mortgage defaults.

The index of pending home sales declined 2.6% in November to 87.6 from a reading of 89.9 in October, according to the National Association of Realtors.

At this point, there is increased concern towards the declining housing market and its impact on material wealth. Lower housing prices caused what is called a “poverty effect,” in which homeowners believe they are poorer and hence spend less, and this impacts the economy.

My advice is to sit tight and be careful towards the current market. Do not chase stocks lower, as the downside may not be over.