Paul and all,
Here's my take on what the markets could do, focusing on the stock market:
Environment
Stock markets all over the world are already in a bear mode for some time.
In the recent days prior to the Islamic terrorists suicide attack the down trend has intensified. Stock indices were already on extreme ST oversold readings before the attack.
Reacting to the attack and the extent of the immediate damage, and fearing US stocks reaction, stock markets around the world lost another 8-15% from Monday's close to Friday's close. European markets that traded during the attack had a knee jerk plunge of 5-8% and regained some back on Wednesday and Thursday, but tumbled back to to the low on Friday (London FTSE faired better cause Britain has Oil from the north sea. German DAX and French CAC both closed lower on Friday then Tuesday).
Bonds raced higher on impulse flight to quality.
USD that has started a down trend in July and corrected sharply up, made a new low against the Euro, Swiss Franc and Yen.
Oil and Gold expectedly raced higher.
Monday
Stocks will be down on Monday. I do not expect a '87 style crash nor a minor move.
My guess is that big boys will be buying around S&P 960-990 (around 10%-12% decline) so that should be a good place to start buying for a ST bounce. The low for the day could reach S&P 900 area at the extreme (17% decline) and there should be a big improvement towards the close if it ever gets that low during the session, which I doubt.
NASDAQ is not going to be the big issue. It is usually more volatile, so the %age decline could be bigger the the NYSE, but compared to historical volatility IMO the Naz would be hit less.
Of course the sectors that are going to get the greater hit are those directly affected - airliners, insurance and travel. The second circle is consumer durable goods producers - Auto makers the usual and best example. The most affected sectors are not associated with the NASDAQ.
The stronger sectors are going to be the usual crisis time gainers - Oil and Gas, Precious metals. Those will rise not as a result of the sabotage act and the immediate damage it caused but in anticipation for the retaliation acts by America to be prolonged and have global repercussions.
Some security stocks are going to do well as their business is going to pick up big time - Check out MAGS.
Shorts will be covering on Monday. Not because it is unamerican to be short at a time like that (this could be a good excuse) but because they will, too, expect a quick bounce. Please try not to take the next sentence emotionally - Bin Laden himself will cover his shorts as his plan worked better then he hoped for.
The bigger the decline and volume, the stronger the end of day rally.
S&P should close between 5-8% down.
Tuesday
Unless Monday closes with only minor decline without the big volume, Tuesday should be up in the morning. The immediate reaction of an extremely oversold market that took an exogenic extra hit.
Later this week
Wednesday and Thursday should be lower volume anti climax days and the market should resume the down trend on Friday.
No new shorts will be opened until after the expected rate cut, which could be delayed. Selling power will therefore be weak without news. So lower volume and volatility on Wednesday and Thursday.
Next week should be mostly down, unless there will be a clear idea what the US retalation acts would be, and those would be the kind that makes sense, and I doubt both.
Look at Oil, Gold and the USD next week for clues.
If gold keeps its ground that's a bad sign.
Longer Term
I'm afraid that the bear market is not going to just go away. The economy was downhill anyway, and the August numbers published while the market was closed were worse still. More lower lows down the road.
Long Term
S&P has still a rich valuation on a growth based set of assumptions. If there's going to be a big change in the investors' mood we could easily see the S&P starting to trade on net asset basis, instead of earnings anticipations of any sorts.
I'm afraid that the 1000 years old Christian-Islamic war has shifted gears.
Until recently, the frontline was in and around the middle east - Longitudes E20 to E40 and latitudes N25 to N40 contained most if not all clashes between the western christian based world and the eastern Islamic world. Salah a Din (sp?) fought the crusaders in the middle east a thousand years ago. Turkey Iran and Bosnia- major clash sites between Islam and western society in the 20th century are within these bounds.
Now that war is taking a different form - no borders and no boundaries. Suicide terrorist on one side, aircraft carriers and cruise missiles on the other, made this war almost global.
Nostradamus had many profecies about the antichrist from the east and the war he will wage against the christian /western world. It doesn't look good.
Sorry to be still very bearish. The only ray of hope is that extreme events usually escalate and therefore also shorten the duration of the trend, so we might go very low, but more rapidly then on my previous scenarios, and recovery will be quicker.
ATG |
