Weekly Equity Market Outlook

Event risk is something that drives me crazy. There is very little one can do to plan for the unforeseeable. There is very little one can do if it goes against them. For example, years ago I was trading and got caught on the wrong side of a Fed rate cut, done during the day and not know. Conversely, when September 11th occurred, I was fortunate enough not to get hurt. When we went to war with Iraq and the bombs rained down, the following three months were difficult as the marketplace tried to gauge whether or not the war was helpful. Lastly, this credit mess, with another chapter today from the US Treasury, Fannie and Freddie, has distorted patterns and created trading conditions are erratic at best and treacherous to say the least.

So essentially here we go again. I was contemplating my possible positioning for this week on Friday as I hard the rumors about this takeover (though to be honest, I had heard a new rumor each Friday over the past month). I dismissed them and dealt with the facts at hand. First, my trend model had turned down as a result of the bloody trade. Second, my long term model supports were taken out at 1250 leaving me wondering how quickly it would take to get to 1070 on the charts. Lastly, I was debating on whether the low for the market would be midweek or at the end of the week. Now that this news comes out about Fannie and Freddie, I am left to wonder - what is going to happen?

Short Term
I am unsure of the short term. The market could look at this Treasury move in both a positive and negative light. Ultimately, I think the best place to look to see if the market likes this plan is the homebuilders (via the HGX) and the banks (BKX). At the moment, both are in upward trends over the intermediate term. An opening higher could be an indication by the market that things were done correctly at the treasury and the conditions will continue to improve in the credit space (and buy extension, real estate). If both of these indexes take a hit, this will continue the selling in stocks. It will also hit the dollar as well (another discussion). if the dollar, housing and financials are coming down, the trend will continue lower. That might make buying later this week risky. At the same time, if it is around 1200, it sets up the bulls for their retest of the lows of this bear market. Thus, short term I will watch what the S&P's do on the open tonight and what the banks and homebuilders do tomorrow.

Intermediate Term
The trend at the moment on the intermediate term chart says this: Things are weak. the trend models are both pointing lower and overall power models argue that the bears control. On the surface, this bailout by treasury removes some uncertainty but now the focus has shifted to the economy anyhow. Housing prices are still falling and unemployment is rising. Sentiment stinks and we have an election coming. This seems like too many variables that make it difficult to change things in favor of the bulls. In terms of the key levels, with 1275 gone, I argue that we are looking for a move down towards the 1175 area before the market bounces again.

In terms of the leaders following the bounce, the Russell and NDX 100, things do not look so promising there either. It appears that 690 will be once in place for the Russell 2000 as the market reversed hard below its major trend indicator. As for the NDX, it is right at support around 1750. A break there argues for a move down another 100 points. This would imply a break of the previous lows. Thus if the bulls have hope for a general market bounce, the NDX has to hold the 1750 level.

Long Term
The Bull/Bear model still points to a bear market. Things have been improving a bit over the past month but nothing major. Credit conditions may improve on the back of the treasury's move but the other variables are not exactly screaming Buy! The break of 1250 on the long term chart in the S&P now argues for the 1150 level next. Of course this is a monthly model which means that there is still time to climb back into the somewhat bullish area of town. The failure by the NDX over the past month argues for a much larger smoking down towards the 1550 level which is past the intermediate term possibilities. Overall, conditions look weak.

So in summary, this week will be interesting. If the banks and the builders bounce higher, we could be looking at much better conditions going forward. The NDX needs to joint his market though and given the selling in that sector, it might be difficult. I maintain my bearish bias on things going forward.