The market has a holiday rally after sharp sell off earlier in the week. However, it is worth noting that today’s volume is extremely low so not much conclusion should be drawn. US dollar, on the other hand, hit another record low against Euro overnight. Gold performed quite well due to weakening dollar. As for next week, we are going to get several important pieces of economic news, including October home sales data and Fed’s Beige Book. How the market reacts to them will more or less determine the market action for the rest of this year.

Market is close today due to Thanksgiving Holiday...

There is no free turkey on Wall Street. Yesterday’s reversal is proved to be short-lived. We started the day in a very negative tone as apparently bulls were more afraid of holding the stocks through holiday than bears. The weekly oil inventory data didn’t help either. But oil retreated amid profit taking. It now seems just a matter of time before the commodity reaching $100 mark. The US dollar got weakened again amid continuing yen unwinding trade. Not surprisingly, gold price moved higher and is now back above $800. I would like to point out that another important commodity – copper – appeared to be very weak recently even in the face of weak dollar. If this trend continues, it may indicate something more troublesome, that is, a slowing global economy. If this is indeed the case, then the last hope that US is able to avoid recession will be taken away. One more thing, S&P 500 index is now negative for the year, meaning most mutual funds are going to lose money for their clients for the first time since 2002. It is indeed a tough year for investors.

In yesterday’s market update, I was predicting a reversal might come soon. We actually got two reversals today – luckily, the market finished the session in positive territory. Even before the US market opened this morning, there were already reversals in overseas markets. For example, the Hong Kong’s Hang Seng Index dropped more than 1000 points before closing its session up by more than 300 points. At 7am ET, the Dow future indicated that the market would open higher by more than 100 points. Then bad news came at around 7:30am when Freddie Mac announced it may need to boost its capital and cut dividends due to tough condition in the mortgage market. The futures market quickly sold off following the news. By the time the market opened at 9:30 am ET, the futures market indicated a flat open. Freddie Mac was opened sharply lower and at one point it dropped by more 35%. However, outside the financial sector, most sectors held up pretty well and in fact were quietly moving higher. By 10:30am the market was actually up by more than 140 points. So we get our first reversal today. Then another wave of sell off came at around 1pm as the market was uncertain about the Fed minutes and its economic forecasts. The minutes came out at 2pm and not surprisingly, it was a very close call in the last Fed decision. The Fed also lowered its outlook of future economic growth. At 2:30 pm, the Dow was off by more than 100 points. Just when some people (including myself) thought it would be another bloody day on Wall Street, the second reversal came. Led by energies(as oil hit another record high today) and financials, the market quickly moved to positive territory and the Dow was actually up by more than 100 points after down by more than 100 points not even one hour before.
On the surface, it seems we have got what we need: really bad news without follow-through sell off, a reversal (actually 2) with the market finishing the day in a positive tone. In addition, many stocks had more than 10% movements in today’s trading and most finished the day well off their intra-day lows. But don’t forget this week is a holiday week. It is very likely that some institutions don’t want to hold short positions into holiday (as can be seen by heavy futures market buying activities before the second reversal). So unfortunately for bulls, they may have to wait until next week to see whether this reversal is real.

The Dow just keeps extending its 150+ point swing day to its record. I’m sure the record will end pretty soon, if not just this week as US will have its Thanksgiving holiday. However, by that time the damage probably is already made. Most indices are now below their 200 day moving average line, which is a very important indicator to define bull/bear market. On the other hand, I have a feeling that we are pretty close to the real capitulation day. All we need is some really bad news from the financial sector or homebuilding sector (for example, a Chapter 11 filing) and a sharp sell off followed by a strong reverse. We are going to get the Fed minutes tomorrow. Currently the market is factored in a 98% chance that the Fed is going to cut another 25bps at its Dec 11th meeting. Apparently, Wall Street is trying to force the Fed to do what they are not willing to do, i.e., cut more interest rates. Treasury bonds rallied sharply today as more investors try to use it as a risk-free heaven. The spread between the risk-free T-bond and the average junk bond is now beyond 600 bps, a level not seen since 2003. The yen unwinding trade is still ongoing and this can also serve as a good indicator for market bottom.