We should resume the downtrend in the markets on Monday. The market rally for the past few weeks were predicated on near term rate cuts by the FED. It appears that hope has all but faded and inflation becomes relevant again. With strong jobs report and unemployment at record low levels, it is highly unlikely the FED will be forced to cut interest rates by 25 basis points.
The markets are never rational and right now, even though we have been harping on recessionary fears, the good news of robust job growth is a negative now that the market has factored in a near term rate cut. It has not factored in the possibility of the FEDS raising interest rate and that may be the likely scenario slowing down the rate of expansion.
As I have said before, the current market rally was in context of broader technical damage sustained on February 27, 2007. The trend for the intermediate is down. The follow through day did not come after the usual 7 to 8 weeks or longer of correction. We can continue to expect volatility.
The other issue with AHM warning is that subprime fungus IS spreading to other areas of mortgage, housing, and probably the economy too. I think that the markets have been too complacent in their bullish stance and now many people are probably going to take a short term loss.
We shall see.
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