Market Summary: Wed. Jan. 23, 2008

What a day – a huge 620 point reversal! We had a gap lower at the open for two reasons. One, Apple disappointed yesterday afternoon with their guidance for the next quarter although they reported very strong numbers from the previous quarter. Their guidance was below analysts’ estimates and the stock just got slaughtered. Secondly, the European markets were down big because the European Central Bank did not cut interest rates. They are still very hawkish on inflation and investors want them to focus on maintaining growth (and global growth).

We were very oversold from yesterday’s big sell-off (although we were able to rally back about 300 points) and I wasn’t surprised that we had that initial bounce around 9 am. The market then proceeded to just roll over and the fear that was in the market yesterday came back. (Look at the “vix” chart – ^vix – from finance.yahoo.com. This is a measure of the fear in the market and we spiked the last two days.) We tested yesterday’s bottom and the technicals help up nicely.

So, why did we rally 600 plus points? One, there was a report that the New York State insurance regulators were pressuring banks to provide $15 billion in capital to help the bond and mortgage insurers. The market has just completely tanked since the beginning of the year because there have been rumblings about these companies (Ambac, MBIA, PMI, MGIC) possibly going under. When this info was released, the shorts were forced to cover and these stocks led the rally upward. Also, there was tons of bargain hunting by investors who just couldn’t resist the ridiculously low prices of some great companies.

All of the great “bull markets” from 2007 seemed to have been hit the hardest – oil, tech, agriculture. There are two possible reasons for this. First, these were the stocks that went up the most last year, so to raise capital investors sell these stocks to buy some of the bargain stocks. Or, because of the emergency fed rate cut (and the potential of another rate cut next week to avoid recession) investors are moving their money into the financials and retailers (mostly short covering). With the big rate cuts, the banks will be able to make more money and the mortgage-backed securities are not worthless anymore. This will be interesting to follow over the next few weeks to see where the “smart money” goes and which industries will take the leadership of the market. Is this the beginning of a new cycle?

What to watch for tomorrow? Microsoft earnings are out after the bell tomorrow (this will move the market Friday morning). Rumors have it they will report strong earnings, but as we saw with Apple, it’s what they say about the next quarter. This report is big for tech stocks because they have been crushed lately (thanks to Apple and Intel). Microsoft is not really a consumer play although it is tagged as one. Only about 11% of their business is consumer-based; the rest is big businesses upgrading their software.

We might have made a bottom today, albeit a short-term bottom, but bottoms are usually retested so I expect more volatility over the next few weeks. There will be special focus on the fed’s decision next Wednesday. Their moves have been very difficult to understand (the last 6 months since the credit crisis began) and the markets will move significantly. Don’t feel like you’ve missed the bottom. If the fed doesn’t please investors, there’s a chance you’ll see much lower prices than mid-afternoon today.