March certainly came in like a lion for the stock market, but will it go out like a lamb? Let's first recap what was an interesting, and volatile period during the week of February 26, 2007. As last week kicked off, we had former Federal Reserve Chairman Alan Greenspan on the private lecture circuit speaking to investors in Hong Kong. His reported comments on recession possibilities this year for the U.S. set the tone for stock market declines in the U.S. and worldwide. Some private newsletters were "reporting" that Greenspan had stated that the U.S. economy was actually headed for recession. Stocks started the week slowly with only a modest downturn on Monday as investors generally were waiting on a number of market moving economic indicators later in the week. The misinformation regarding Greenspan making recession talk began making the rounds and unsettling the markets.

A sharp stock market drop on Tuesday in China exacerbated the correction mentality that expanded worldwide, including hitting the U.S. The Chinese government has been reportedly trying to ease what it believes to be a speculative bubble in equity prices.

The 8 percent drop in the Shanghai market on Tuesday further prepped U.S. markets for a correction. Finally, Tuesday morning's bigger-than-expected drop in U.S. durable goods orders was the final factor causing U.S. stocks to take a dive. Improvement in existing home sales and the Conference Board's consumer confidence index did little to slow the drop in stocks. Wednesday brought out the bargain hunters as fourth-quarter GDP came in with downward revisions, as expected. The bargain hunters nudged stocks back up despite a 16.6 percent drop in new home sales being released Wednesday.

On Wednesday, when speaking to a group in Tokyo, Greenspan corrected that misinterpretation of his Monday comments, stating that recession was possible but not probable. But the stage had been set, and traders were nervous. Greenspan's clarification commentary helped the market recover somewhat. Nonetheless, market participants had talked themselves into believing that the economy was slowing too much and that interest rate cuts by the Fed were needed and were likely. The personal income report came out Thursday, showing robust growth and core PCE inflation rebounding. Stock markets saw any immediate Fed easing slip away. However, a moderately favorable ISM manufacturing report on later Thursday morning helped stabilize the markets - helping to partially erase memories of the bad report on durables orders.

To top all that economic news off, markets participants have been talking about the health of the subprime mortgage industry and the ramifications to the U.S. dollar of the end of the yen "carry trade." Carry trades are when investors borrow in low-yielding currencies, such as the yen or the Swiss franc, to invest outside the country.

When the dust cleared last week, the Dow was down 4.3 percent; the S&P 500 down 4.5 percent; the Nasdaq, down 6.0 percent; and the Russell 2000, down, 6.3 percent. Year-to-date, the Dow is down 2.8 percent; the S&P500, down 2.2 percent; the Nasdaq, down 2.0 percent; and the Russell 2000 is down 1.6 percent.

From my point of view, a careful review of last week's data shows only marginal changes in the direction of the economy. Manufacturing is nowhere nearly as weak as some believe new orders suggest. Inventory investment is down, leaving little overhang. Newer survey data show soft manufacturing, but not manufacturing in recession.
Housing is mixed and data are not reliable during winter months. The consumer sector is quite robust and will provide key support for manufacturing. Core inflation is still too high and the Fed will see inflation as a greater risk than too weak growth. I don't see recession anywhere on the horizon. We are likely to get a soft first quarter but then see better growth the rest of the year.

Trading Strategies

When trading volatile markets like we've seen, I can't stress enough how important money management is. Use stops, scale back your trading, and/or reduce your exposure.

The S&P 500 futures have seen about a 4 percent correction in one week, and bore some technical damage. Currently, the market is on the mend, with the June contract up in early trade and hovering around 1400. June's low at 1384 looks like a good support point to watch during the session. Momentum indicators, the relative strength index (RSI) and stochastics remain bearish, so for now I'm recommending selling rallies. Day traders should also watch 1367, if it doesn't hold, we could see a drop down to1357. I'd recommend 1384 as a possible selling point, with 5 or 10 point stop on the trade.

Stock index traders should also keep their eye on gold and crude oil. I see pullbacks in all these three markets as indicative of a potential global slowdown, or at least the fear of one. While there is a possibility of an economic slowdown, I don't see it as the type warranting the panicky behavior we've seen in the markets the past week.

Last week the price of gold fell more than 6 percent, and the NYMEX April futures contract dropped $21 to $644.10 an ounce. It's currently down, trading at $639.40. From a technical point of view, this market looks bearish, but a close above $659 would be a sign of stabilization. At $632 I'd recommend trying to buy, with a stop at $627. As far as crude oil, while still strong overall last week, this market is showing vulnerability with resistance holding at $62.50. I can see a move to $57 possible, and if $57.50 fails in the April contact, look out below. Currently, the market is down slightly at $60.40 a barrel. Play trading ranges in these markets.

Please feel free to call me at 866-231-7811 or contact me via email at jfriedman@lind-waldock.com if you have questions on this topic or to discuss specific trading strategies for your unique situation in this or other markets.

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