The Day that Was - September 12th 2007

The first hour of trading this morning brought some buyers who were trying to move the market but after 10:30 the volume just vanished. And by the end of the day sellers took it back down. A text book case of 'no conviction' to step up to the plate and take a swing. In many aspects today had the appearance of people just wanting to go home so they went down on the field and just collected whatever loose change they could find and took it home.

The fact that oil hit $80 today made the energy sector light up a bit but otherwise the effect of the rising oil price seemed to end there. It does not appear that the oil price held the markets back today, the markets were held back today because no one was playing. After the large run up yesterday on low volume it was a signal that there would not be much enthusiasm for a follow through. Remember that volume is ALWAYS a key to understanding the markets behavior. Price movements may look great by themselves, but always compare it to the volume to understand the "intensity" of any movement.

The markets are becoming increasingly 'worried' about what the FOMC will do next Tuesday. Speculation is running wild, everything from 25 basis points all the way to a full 1%. One analyst today claimed that the damage to the economy is so severe that it would take a full percent cut in order to return liquidity and stabilize the economy. Only problem with that is a cut that severe will panic the markets because it would be a sign that the economy was "real bad". In which case there is nothing to support the markets to keep running higher. Keep in mind that the prices people are willing to pay for a stock are tied to the economy. If the economy is weak, then companies are earning less, so the stock in that company has less value. A thriving economy creates growth in all aspects of business, more money invested by the companies, more sales, more products, etc. This drives the earnings up of the companies and in turn the perceived value of the stock and hence people willing to pay up for it.

When the economy softens and/or weakens it is not just the average person who feels the economy weaken, it is every company. A company is only good if people are willing to spend money, buy the products, sign contracts for new work, and so on. The economy is a large spider web, a disturbance in one part of the web shakes the entire web. In our case right now the web has holes in it from a bad storm and the FOMC is in charge of trying to repair the holes before the web completely breaks apart. But are they too late? There is a chance that another storm could hit before the current repairs are completed.

The lack of volume is saying that people are staying in their homes for fear of getting caught in another storm. And in some cases people have good radar systems and they can see the dark clouds looming in the distance. So they are collecting their bottles of water and other rations for a long stormy recession. The FOMC is caught in the classic "rock and a hard place". Because they have been sounding the "all is well" tune so long they have let the damage get too severe. Now they will have an even harder time trying to correct the situation. A drop in rates will lead to an even weaker dollar (which is already in the basement) and that will soften the economic picture even more. If they don't cut rates then they will fail to add the liquidity that the market is not hurting for. In either case the chance for a recession is likely and the long term picture for our markets is down.

On the day the FOMC makes their decision if they announce a rate cut I will expect to see the markets rally on the news. But I also expect it will exhaust itself out rather quickly and sell off. Could be hours, days, or a few weeks later but it will fall. If they don't cut the rate then I would expect to see an immediate sell off. Whatever they decide the chances for a recession remain the same in the near future.

The rising oil prices will further erode the Dow Jones Transportation index. This index is necessary for a healthy market as it needs to follow in step with the other markets. I have included a chart tonight of the DJ Transportation index vs the S&P 500. Notice how they are continuing to go in opposite directions from each other. The declining transportation index is acting as one more anchor on the broader markets and will likely help to pull the markets down.