Bears are back. Despite strong performance in the key financial sector following BoA’s takeover of CountryWide Financial, all three major indices dropped by almost 2 percent following earning warnings from American Express and Tiffany. Consumer stocks were hammered as investors fear that consumers may finally pull back their wallet. Many restaurant stocks, for example, were down by more than 5 percent for the day. Tech stocks were also among big losers as tech spending from the business sector might be questionable following recent turmoil in the financial market. Treasury notes rallied and pushed the 2 year yield spread relative to the Fed fund rate to the widest since 1981. The spread between high yield bond and treasury continued to expand and now is well above 700 bps. On a positive note, the 3-month US LIBOR rate was down sharply during the past month and now is just a little above the Fed fund rate, indicating liquidity is back in the banking sector. US dollar was mixed against major currencies while gold price continued to advance. It closed the day just 3 dollars below $900 after earlier briefly breaking the $900 mark. Oil price, on the other than, dropped by $1. On the economic front, the trade balance for December widened more than expected to $63 billion due to higher petroleum costs. This may spur economists to revise down their estimation for Q4 GDP number. We are entering the busy earning reporting season next week. Investors are expected to pay close attention to earning announcements from several troubled financial firms, including Citigroup on Tuesday, Merrill Lynch and Wallington Mutual on Thursday. Any positive surprise from those names may be a trigger for the market to move higher. In addition, Intel (Tuesday) and IBM (Thursday)’s reports are also worth watching.

Another roller-toaster day on Wall Street for this Thursday. The market opened the day in red following overall disappointing chain retailer results and decisions by ECB and BOE to keep interest rates unchanged. Despite the negative news, the market quietly moved higher and was traded at around unchanged level before the Fed Chairman Bernanke’s statement was released at around 12:30pm. In the prepared statement, Bernanke mentioned that he would “take substantive additional action” against downside risks. And this was seen as an approval for more aggressive interest rate cuts in the next few months and the market reacted immediately by pushing Dow up more than 200 points from its bottom even before Bernanke started his speech. Then at 1:00pm, Bernanke started his speech. The speech itself didn’t have much new information and was basically repeating the prepared statement. Then in the Q&A session when asked about his personal view about a possible recession in US, Bernanke seemed to dismiss such a possibility and this reaction prompted a wave of selling that pushed the market back to where it started as traders suddenly realized they didn’t really get anything new from the statement(as the market has already priced in more than 80% chance of 50bps cut before the statement was released) and the Fed is not going to take any emergency action before its next meeting at the end of this month. Just when it looked like yesterday’s rally was in jeopardy, rumour that Bank of America’s potential takeover of CountryWide Financial pushed up the whole financial sector and the broad market quickly followed suit. By the closing bell, all three major indices registered almost 1% gain for the day. US dollar dropped against most major currencies as the yield spread is seen to expand following today’s decisions from ECB and BOE. The weak dollar pushed gold price to another record closing. Although I’m bullish of the commodity for the long term, a short term pull back is very likely before it breaks the $900 mark. After the bell, American Express cut its Q4 earning estimation citing slowdown in cardholder spending and rising delinquencies, leading to a 5% drop in the stock during the after-hour trading. The news basically provided new evidence to the fear that the sub-prime issue is going to spread to the rest of the economy and slow consumer spending eventually. Market is set for another test tomorrow…

The market had a late day reversal and all three major indices closed the day higher by more than 1%. There are several rumours cited as the trigger for the final 90 minutes reversal that pushed Dow up by more than 200 points from its bottom. One is that the Fed Chairman Bernanke may announce an intra-day interest rate cut before he speaks tomorrow. Another is Warren Buffett is going to bail out several troubled bond insurers. However, as always, I don’t put much credit to such rumours. For now, I would rather view today’s action as an oversold and short-cover rally. In fact, more than 1000 stocks hitting new 52 week low before this afternoon’s rally. We will get more confirmation tomorrow. Oil price dropped following a rather bullish oil inventory report. Gold, on the other hand, changed little despite a broad increase in US dollar. It seems that the recent surge in the gold price has more to do with fund flows than a weak US dollar. For example, China just started its gold futures trading yesterday and the front-month contract was opened at limit up before closing the day up by more than 5%. Tomorrow we are going to get speech from the Fed Chairman Bernanke and also several chain retailers are going to report their December same-store sales results. Across the Atlantic Ocean, the Bank of England will meet tomorrow to determine its key interest rate and the market now is expecting more than 50% chance of a rate cut.  

All three major indices ended this Tuesday sharply lower with Nasdaq now down 8 sessions in a row. The market stayed in the positive territory until 90 minutes before the close when a wave of selling in the financial sector pushed Dow down by more than 250 points. After today’s decline, all three indices are in the official correction territory (defined as 10% decline from previous peak). VIX Index did jump by almost 10% in the last 60 minutes but the closing value of 25.58 was still not high enough to indicate a bottom. It seems that just like many previous financial crisis, the market needs some scapegoats before it can move materially higher. The most obvious candidates can be found in the financial sector and the list includes the largest mortgage underwriter CountryWide Financial (CFC), ETrade Financials (ETFC) and the largest bond insurer MBIA (MBI). If any of these top candidates goes under, chances are the Fed may take an inter-meeting emergency rate cut along with addition steps to calm the market and this may become a trigger for the market to move higher. Although this is a pure speculation, the chance of it happening is clearly increasing. The market internals just kept deteriorating with close to 900 stocks hitting their 52 week lows today. Gold price hits another record high and now is above $880 as investors are hedging against higher inflation. Both Philadelphia Fed President and Boston Fed President showed willingness to cut rates further if the economy growth is in jeopardy. Currently the market is betting almost 70% chance of 50bps interest rate cut in the next Fed meeting vs. 30% chance of a 25 bps cut. Tomorrow we are going to get St. Louis Fed President Poole to speak about the economy.

Dow and S&P managed to close in the positive territory while Nasdaq continued to drop for a seventh day. There was no major economic news scheduled to be released today but traders nonetheless hoped to get some clues from speeches by Bush and Paulson. However, both failed to deliver an immediate plan to bolster the economy. The market internals were not looking good with almost 800 companies hitting new 52-week lows on NYSE and Nasdaq. US dollar gained some ground against other currencies and most commodities ended the day lower. Oil price dropped by more than 2 dollars per barrel as traders feared that a slow down in US economy will lead to weakening demand for the commodity. Commodity stocks were among the biggest losers for the day. One of the biggest problems for the market is the lack of leadership. One sector that is hot in the previous week may be dumped just as quickly this week. Another problem is the lack of the so-called fear factor. Although many internal technical indicators were clearly broken down, the VIX index barely moved since mid December. From this perspective, the market still needs some time before reaching a bottom. One positive sign for the market moving forward is the continuing drop of the inter-bank rate after several central banks announced a concert effort to inject liquidity. For example, the 3-month EuriBOR is currently traded at around 4.62% vs. a high of 4.95% reached on Dec 17th. Tomorrow we are going to get news for pending home sales also two Fed presidents are scheduled to make comments about the economy.