What difference a week can make! Just one week ago, Dow broke 14000 for the first time and everyone seemed to be certain that summer rally would continue. Today, almost every rally seems to be a good chance for investors to load riskier assets. Some investors may argue that the credit issue has triggered this sudden plunge. However, in my opinion, it's investor sentiment that really drives this market these days. Subprime issues(and the following higher borrowing costs) have been known to the market for months. Fundamentally, the economy is still doing fine as evidenced by today's GDP report. But investors simply don't want to hold stocks. Oil closed higher again(almost $77) and is only inches away from historical high. I guess it will get there next week. Dollar gets strengthened against all major currencies for a second day in a row. And there is a good chance that dollar has bottomed. Most earning reports so far(based on 300 out of 500 S&P500 companies reported) are either beating(65%) or meeting expectations(18%). Market valuation is still reasonable(at 15 times forward earnings). VIX doesn't create another high today but closed at a level not seen in more than 1 year. There is a good chance that Monday will be another volatile day. Stay tuned!

Several weeks ago, I made a statement that predicted the Dow would trade the rest of the summer within 13K - 14K and it would be a quiet summer. If one checks the closing Dow index today, it was as close to the middle point of that range as possible. However, the path to reach this point is anything but quiet. Investors suddenly got worried about the tighter financing conditions, which would lead to less LBO deals and essentially dry up liquidity. In my opinion, it's still too early to tell whether such a fear is legitimate. What really matters is the underlying economy. If most business sectors are doing well and the housing problem is confined within the housing sector itself, investors should look pass this issue pretty soon. On the other hand, if the subprime issue spills over to prime loan sector and commodity prices start to drop in a big way(reflecting weak global growth perspective), then a real bear market may be on the horizon.
Although US market dropped more than 2% today, most emerging markets dropped more than double of that amount. One exception is China, which sets a new historical record overnight. The Chinese market is an isolated market and wouldn't be influenced by other markets. However, if one day Chinese market is in big trouble, the rest of the world may not have the luck to escape big dropoffs.

The market rebounded somewhat from yesterday's sharp drop. Most earning reports continued to show strengths in corporate profits. However, the market had a sharp sell-off in late morning after news that part of the Chrysler buyout deal may have to be financed by bridge loan(essentially banks would take the risks on the balance sheet) and this indicated a tough financing condition(a reminder of late 1989 when the last LBO cycle was peaked). After the initial sell-off, investors seemed to believe that yesterday's big selloff was overdone and moved the major indexes higher across the board. Most commodity prices had a big selloff today as dollar got strengthened against Euro and Yen. Oil, on the other hand, shot up by more than $2 dollars --- as the market is dominated by hedge funds so the volatility is not unexpected. After the market close today, Apple will release its latest earning's report and I expect it will beat expectation by a wide margin. The key point to watch is how the stock will perform tomorrow.

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