Many gurus in recent weeks have come out with predictions that the market has bottomed, and is ready to rebound. Although anything is possible, the likelihood of a rebound is somewhat unlikely in my opinion. For one thing, the stock market started its decline, if not a crisis in the last days of 2007 and continued well into March of this year. The market dropped more than 20% from its peak of Dow at 14000. Now, as bad as that sounds, a market that has troubles in wide-reaching credit system, real estate bubble, worthless dollar, and inflation in almost everything in a daily need, is one that would certainly drop more than it has so far.
Looking back at the Nazdaq bubble in 2000, many "gurus" also said the market has bottomed is ready for a rebound every time there is a technical rebound. Note that the Nazdaq did not drop from 5000 to 1200 overnight, but it did so with several 1-2 month rallies in between, but only to drop even further when the steam runs out. Traders and fund managers on Wall street hates to see their portfolios drop double digits, and tends to sell at managebal losses and re-balance their portfoilios. Everytime they do that, there is a rally in specific sectors (usually the ones that has dropped the most, getting funding from trades who sold their losses in other sectors that dropped less) and thus bidding up the market. Therefore, the "rebound" we're getting in this couple weeks, really is a technical rebound and one that is NOT sustainable. Especially when many traders go on vacation in the summer, when the market tends to drop in allmost every summer, we will see this rebound dissipate. That would prove a real buying opportunity for the bulls. I would predict 4Q 2008.
Furthermore, the Fed has pretty much ran out of ammo by cutting the interest rate to 2%. Cutting anymore, would cuase a widespread infaltion that is beyond remedies.
The Fed cut rates to 2 percent this week from 5.25 percent in September. With the value of the dollar falling against foreign currencies, and rising commodity costs pressuring consumers at the gas pump and the grocery store, the central bank wants to steer clear of actions that will push prices up even more.
By lending directly to banks, the Fed can provide capital that banks need to lend to consumers and businesses without fueling higher prices in industries that don't.
By relieving the seizure plaguing financial markets, the Fed hopes it can free up the cash many banks are hoarding. This would presumably encourage banks to lend their money out through mortgages or business or car loans.
Recent months have seen surging food and energy costs. Wall Street is concerned that the threat of inflation and the persistent struggles of the housing market would force consumers, who account for about 70 percent of U.S. economic activity, to spend less.
The Fed said Friday it would boost the amount of emergency reserves it supplies to U.S. banks to $150 billion in May, from the $100 billion it supplied in April. The Fed took this action and several other moves to boost credit in coordination with the European Central Bank and the Swiss National Bank.
But even after the Labor Department said the U.S. economy shed 20,000 jobs last month -- fewer than expected -- stocks had a lukewarm response. That suggests that, like the Fed, investors aren't sure the credit crisis has been contained.
So be cautious in this market right now, and don't rush into buying stocks. Especially ones that has seen a rebound in recent weeks, as this market is certain to do a W-shaped rebound, before it really takes off into another bull run.
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