Down and Then Up Again?

10/23/2007 12:00 am EST

Focus: MARKETS

Mark Leibovit

Chief Market Strategist, VRTrader.com

Mark Leibovit, chief market strategist for VRTrader.com, says stocks may sell off some more before rallying again, especially if the Fed cuts rates again.

Subprime concerns, along with concern over inflation and tension in the Middle East led traders to dump shares in a big way Friday. Volume came in at a solid pace and breadth was horrible.

Friday's action was brutal for the longs, but definitely bearable if you followed our Timer Digest "Sell" signal, [which] I flashed on October 3rd.

On Columbus Day, October 10th, I said that the Standard & Poor's 500 would decline to 1492 in sympathy with the year Columbus allegedly discovered the New World. Subsequently, I projected a decline in the Dow Jones Industrial Average to 13,200, which would fit the pattern of a normal "cyclical" correction based on recent volatility and history.

Alas, it is October and a panic atmosphere has now been created. We could now easily see a decline to significantly lower support levels, e.g., 1460 on the S&P and 12,800 on the Dow. All we can do here is wait and watch and, of course, enjoy the short position we are holding in the S&P.

One reason for the selling Friday was latent concern about inflation. Do not believe a word of these meaningless "core" inflation rates the government publishes. The dollar is also falling through the floor, and [Federal Reserve Chairman Ben] Bernanke is looking for another excuse to cut rates and "save" the market? This is absolute lunacy, but it just might happen.

If the market senses another "Fed put" in the works, it could be off to the races to the up side once again. (Fed funds futures traders are evenly split on the Fed's next move on October 31st, with the November contract yielding 4.62%, a 50-50 chance of a steady Fed rate at 4.75% or a quarter-point cut to 4.50%.)

The dollar, trading at an all-time low against its major trading partners, may extend the decline after the Group of Seven failed to address the drop following a meeting of finance officials [last week].

The US Treasury is engineering a weak US Dollar to boost exports, which rose to a record $138 billion in August, up 38% from four years ago. A weaker US dollar also inflates the earnings of S&P 500 companies, which earn roughly 44% of their revenue from overseas, mostly in euros. [Treasury Secretary Henry] Paulson aims to offset weaker US home prices with an inflated stock market, to prevent the US economy from slipping into recession.

``With the political elements out of the picture, the dollar will resume its slide as people start to focus on fundamentals,'' said Robert Fullem, vice president of US corporate currency sales at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``The dollar is going to be under pressure as the growth outlook weakens. Risk aversion is the focus now.''

This should be bullish for precious metals and ultimately bullish for US stocks.

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