As this winter season ends, the market has been struggling to keep a bit of heat. Yes, it has made a few big moves to the upside. Who can forget the triple-digit gains the Dow made just last Tuesday, March 11^th?  Yet the general momentum seems to be downward. There is so much pressure weighing on the market. Anyone could understand that the struggle feels quite overwhelming. Still, the market is getting some help. Last week, the Fed and other central banks collaborated to help the US Dollar and the US markets. And the Fed clearly remains committed to supporting this market and avoiding a recession. But the inevitable might already be upon us. And, as winter comes to a close, the bears are coming out of hibernation. They are ready to eat and they’re taking a big bite out of the market. Let’s begin with a quick look at the global markets.

In Asia, the week opened with the bears taking control of the markets. The Nikkei fell 3.7 percent. However, this plunge was shared by other Asian indexes. India’s BSE Index fell a dramatic 6 percent and the Shanghai index fell 3.6 percent. Much of this decline was attributed to the sharp rise of the Japanese yen against the US Dollar. However, Tuesday, March 18^th showed a dramatic difference. The Asian markets seemed to regain their upward momentum. The Hang Seng gained 1.4 percent while the Nikkei closed 1.5 percent in the positive. Most analysts attribute the high volatility and upward momentum to bargain-hunting in the market. However, the Shanghai index did not participate in Tuesday’s rally. The index lost another 4 percent by the market’s close. The Shanghai market, which doubled its value in 2007, has fallen by 30 percent in 2008. Perhaps the runaway inflation is the cause or a contributing factor to this white-hot index’s decline—and that’s exactly what the Peoples’ Bank of China is meeting to discuss this week. Stay tuned.

In Europe, the indexes fell to 2005 low levels on Monday, March 17, 2008. Following the fire-sale at Bear Stearns Companies (BSC), the banking sector thought it would be kicked hard. And it was. But it appears that a rebound is happening on Tuesday, March 18^th. The European Big Four group is trading strongly in the positive with Switzerland’s SMI index at the forefront with a 2.8 percent gain. Germany’s Dax is in the second position with a 2.3 percent gain while London’s FTSE and France’s CAC are each trading up 2 percent. Still, the banking sector is struggling with HSBC trading down more than a percentage point. However, the oil companies are weighing very heavily on the indexes. Oil giant, BP, plc (BP), is trading down 3.4 percent. Royal Dutch Shell (RDS.A) is down 2.4 percent and Total (TOT) is down nearly 2 percent.

Back in the US, the indexes are taking a big hit in spite of intervention by the Federal Reserve Bank. The Dow ($INDU) closed slightly higher on Monday, March 17^th, but the S & P 500 ($SPX) and Nasdaq ($COMPQ) closed in the negative. The banking and financial sectors have been extremely volatile for the past few weeks, which might have prompted the Fed’s actions. However, the markets are struggling to keep above water in the face of the rising prospect of recession. It’s not easy to be optimistic while surrounded with so much news. Oil is up to record high levels. Gold is above $1,000 per ounce. Interest rates are falling, but many so important economic factors are declining that the market is reacting with retreat. Let’s take a closer look at the economic reports coming this week.

Economic Reports

The economic reports have been the stars of the market show in recent weeks. This week is not much different though another star is also getting a lot of attention. We have more on the second star later. The economic data is strong in this week before the Easter holiday. Yet one report is grabbing more attention than all the others combined. It’s too late in the month for the jobs report and manufacturing data so the only other report it could be is a Fed announcement. And that’s exactly what is coming on Tuesday, March 18^th. Yes, that’s right. Yet another Fed announcement is expected. The Fed just had an emergency meeting last weekend and decided to cut interest rates. This move sent the US Dollar plummeting and the Japanese Yen soaring to new levels against the Greenback. Of course, this could also have been a contributing factor to the decline of the Asian indexes on Monday, March 17^th.

The FOMC announcement is one of the biggest movers of markets around the world. Interest rates are a major factor in how the bond, stock, and currency market move. Interest rates are directly connected to the value of a currency and the ability to borrow money for individuals and corporations. So, the Fed’s actions have very large ramifications. And not just the actual rate decision. The Fed’s minutes (or notes) that accompany the decision carry a tremendous amount of weight because they can reveal its policy on fiscal intervention and involvement. Mr. Bernanke indicated his intention to have an active central bank – and he certainly proven the veracity of his statements in the minutes. The Fed is expected to lower interest rates again. If the Fed loosens money by lowering interest rates, stock market could rise since the cost of corporate borrowing will decline. The bond market could rise because the price of fixed income assets will increase. On the other hand, the value of the Dollar tends to decline when interest rates are cut because foreign investors will sell their dollars in order to buy a higher yielding currency, like the Euro or Swiss Franc.

The FOMC minutes will be released on Tuesday, March 18^th at 2:30pm.

We have other reports coming this week. The other big market mover is the Producer Price Index (or PPI). The PPI measures the difference in prices that businesses pay to other businesses. The core PPI is expected to decline from 0.4 percent in January to 0.2 percent in February. This is yet another sign that the economy is softening into a recession. For next week, which is the last week of March, we have the Durable Goods Orders report and housing data from the Existing Homes Sales and New Homes Sales reports. I doubt that the market will get much support from these reports.

Let’s take a quick look at the company news.

Company News

Ouch! That is probably the best way to describe the market on Monday, March 17^th. This is particularly true for the banking and financial sectors. The market had major plunges that can only be described as legendary. With the Fed circling around ready to drop interest rates, the financial sector was circling and ready to drop share prices. And that is exactly what happened.

While the Dow closed in slightly positive territory, the S & P 500 declined. The banking and financial sector tugged strongly on the indexes to prevent the runaway bullish movement that the market expected. Let’s look at the biggest company to drag on the market.

Bear Stearns Companies, Inc. (BSC) made a dramatic, almost unbelievable, decline before the market’s close. It is rare to witness such a loss so you must look at the chart below.

Figure 1: Bear Stearns Companies, Inc. Daily Chart. BSC declined 84 percent on Monday, March 17^th. The fire sale by JP Morgan (JPM) might have saved it, but the writing was definitely on the way. Or rather on the chart. Look at how the share price was “walking the band” (pink) downward before the big gap. Notice how the oscillator (red) showed rising downward pressure. The signs of a fall were certainly right before us. Then came the gap.

But Bear Stearns was not the only company in the financial sector to make a major decline. Far from it. BSC had lots of company. Lehman Brothers, Inc. (LEH) also made a major decline on Monday, March 17^th. The company fell 25 percent. And JP Morgan was not pardoned from this siege. Indeed, it fell more than 10 percent by the market close. Perhaps the Fed was working to prevent more major declines by lowering rates. Its announcement later today will show what the central bank is made of.

So, this week is exciting and full of surprises. The week ends with the Good Friday holiday when some of the markets will close early. Perhaps the market needs a breather at this time.

Market Moves Wisdom of the Week

Mind the Gap!  Every trader would love to be on the winning side of a gap. It is one of those thrilling events to turn on the computer and find that your stock, option, or commodity has made a large and favorable price movement while you slept. Gaps are exciting. However, gaps can go in both directions. Holding a position on the losing side of a large price movement can be depressing and de-motivating. Traders need to be positioned for both kinds of gap. So the Market Moves Wisdom of the Week is to be prepared to profit from gaps in the market. But also be prepared to protect yourself from gaps that move against you. In this way, you will be positioned to maximize profits and minimize losses. And there won’t be a gap in your trading account!


Robin Lofton
Staff Writer and Trading Strategist
Profit Strategies.com