The Curious Investor

After such an interesting week in the equity markets, I can’t help but want to add my two cents to the flurry of market opinions being voiced in the blogosphere. Also, I figure it my be interesting to readers out there for there to be some more practical posts that actually deal with the markets as opposed to tutorials without any application. So, I’m hoping to make these Curious Investments posts regular at the end of each trading week. I’ll say right now that I’m not a market genius and that I may well be wrong in my analysis. I encourage you to respond either via comments or e-mail to me if you disagree with anything voiced in these posts.

The Review
After a great start to the week and what looked like the beginning of a turnaround, subprime woes hit the market again. This time credit worries crossed the pond and hit BNP Paribas and investors were left wondering just how far subprime could go. Many were counting on the global boom and global liquidity to support US equities. With questions about subprime poisoning investors outside of our country, fear and panic spread throughout the investing public. The market continued its tremendous volatility this week and the Fed has finally begun to intervene which is both a good and a bad sign. One could assume that the intervention should help alleviate problems caused by the current credit crunch. But, the fact that things have gotten so dire that the Fed must intervene can only lead to more questions on how deep the subprime crisis runs. Cross your fingers that the recent “liquidity injections” are enough to placate the market and that the Fed is not forced to lower rates. Interest rates, despite recent history, are at historic lows and inflation is still a question mark (if not an outright problem) in the broader economy. The Fed needs to be able to keep rates where they are to have the leeway to adjust rates should a true economic crack emerge. With the US economy still on good ground - tight job market, healthy corporate balance sheets, and adequate growth - the implications of too lax a monetary policy (i.e. lower interest rates) go way beyond just helping subprime mortgage holders to pay for their homes.

There is some good news, though. This week marks the best week in the last four weeks for the NASDAQ, S&P and the Dow. The mess is still there but we’re starting to see some of the crisis working through the system. Earnings this week, particularly in tech, were strong and lost in all the fear has been that this earnings period has been as good as any in recent memory. Questions about July sales numbers abound, but, for now, it seems that the average American has been less hurt by actual problems in the economy than by subprime fear mongers. The question that is left is - Is this the eye of the storm or are we setting up to bottom out and run when next quarter’s earnings come? Let’s take a look at some charts and see if we can make sense of things.

Take a look at the iShares high-yield bond ETF (HYG), it looks to me that corporate credit markets are starting to bottom which could be a good sign for LBOs and general liquidty.

Looks like the S&P has found some support at its 200-day moving average which portends well on a technical basis. We’ve been needing a good pullback and the pull back on this graph has correction written all over it. Granted, its a correction has been scarier and more volatile than most, but we’re only 6.5% off of highs and again this portends well for stock markets assuming we can work past the subprime issues.

All-in-all, it looks like the fear which is driving the market is starting to subside and investors as opposed to traders are nearly ready to get back in the game. Tech’s stronger performance over the last few days could be a leading indicator as strong earnings within the space have woken up some investors and insulated many tech stocks from the wide sell-offs in the rest of the market. Next week will be an important week for the markets. The hope is that the stocks can retain some consistency and traction at these price levels. Don’t expect a rebound just yet, but be willing to hold through some market churn. Also, fill up your shopping lists. Fear and irrational selling always make for some mouth watering buying opportunities.

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