Now That Was Ugly.

The market was beaten with the ugly stick this week. There is no way to sugar coat that fact. The world conspired to serve up a wicked stew of nasty events. This is the week that fraud at a Japanese internet firm knocked shares on the Tokyo Stock Exchange down over 6% on Wednesday and forced it to close 20 minutes early. http://news.yahoo.com/s/ap/20060118/ap_on_bi_ge/Japan_markets. The Iranians seem to be intent on forcing a major confrontation with the West and Europe is suffering through one of its coldest winters on record which is forcing up the price of natural gas. The saber rattling from Osama bin Laden also didn't help.

Earnings also were punky. High profile companies disappointed or reported earnings that were not better than Wall Street was looking for. It was a week in which "Event Risk"-a subject for a future post- reemerged as a problem for individual securities. Throw in a really ugly options expiration on Friday and you have the makings of a rout. On the day the S&P 500 lost close to 2% while the NASDAQ Composite was down over 1.5%. America's love affair with all things Google was repaid with a 37 point loss. That's real pain for the buyers of that stock on Wednesday or 70 points ago.

Now at the moment most of the major averages have given back the majority of their gains for 2006. The good news is that the overbought state we talked about last week is being pretty quickly worked off. See this link to an SPY chart to illustrate this point. http://stockcharts.com/def/servlet/SC.web?c=SPY,uu[m,a]daclyyay[pb50!b200][vc60][iUb5!Li12,12,6]&pref=G. The collapse of RSI and the stochastics readings (basically price measures which assist in measuring the mood of buyers and sellers of stock) place them both back into areas from which price often shows a probability of a rally. I will cover how I use these in a future post so don't worry if these terms mean nothing to you. For now just take my word on it.

The markets have fallen back into the consolidation ranges where they last traveled for most of December. That should provide some near term support for prices. In fact a lot of indexes and individual names were savaged enough by Friday's decline that I am inclined to do some looking for buying opportunities* in these beaten up areas at some point next week. I would really step up this process if the market has a gap down open on Monday.

The other side of the coin is that we now have to consider the possibility that the market may be capped to its upside at the price levels from which it started to retreat early last week. A market that is unable to break to new highs on any subsequent rally from these or lower levels just raises further suspicion that the price movement we experienced from last fall is either over for now or in need of a rest. For example if the SPY is unable to move above that 128 level on any subsequent rally it is likely to retreat in price or remain range bound for the time being. That would again force me to be a net seller of stocks for clients* in the coming weeks and months.

*Purchases and Sales of securities and portfolio holdings varies among Clients of Lumen Capital Management due to their individual portfolio goals and risk parameters. Nothing in this post, past or subsequent postings should be construed as advice to buy or sell any particular security. Certain clients of Lumen Capital Management, LLC are long SPY although postions can and do change from time to time.