Stocks Consolidate For Week

Saturday, March 21, 2009

Fundamental Take:
The market fell 122 points Friday capping off a stable week with the Dow gaining a modest 54 points to close higher 0.75% for the five days. This week's major event was the Federal Open Market Committee's policy statement release on Wednesday. The Fed pledged a $1.15 trillion increase in purchases of debt on the open market. The Fed will buy $750 billion in mortgage-backed securities and another $100 billion in agency debt. The major headline was the Fed's plan to purchase $300 billion in long-term Treasury bonds. While the Fed has hinted at this possibility in past meetings, investors were surprised by the aggressive action taken at this week's meeting. With short-term interest rates near zero, the Fed has increased its aggressiv
eness in fighting the current recession by driving down long-term yields as well. Even with stocks gaining ground into the meeting these actions sufficiently impressed traders to rally the Dow over 200 points immediately following the statement release. Yet, reality set in over the next couple days as stocks gave back the meeting's gains and more closing near flat for the week. Investors realize that the Fed is using all of its tools to fight this recession but have yet to see the effectiveness of these actions and are beginning to fear inflation down the road. This inflationary fear has prompted TWS Investments to release the trade idea to buy gold at current levels.

Technical Take:
The market was in consolidation mode this week holding onto the large advance off lows made in the previous week. The first three days saw a solid 250-point advance and the following two days saw a 200-point fall.
Financials have accounted for the bulk of the market's gains and will be the primary indicator of whether this move holds. A stabilization of the financial sector is key to the market's recovery. Short-term momentum is currently to the downside as the week ended with two negative days and there is no strong support level until 7,000 on the Dow. This support level also coincides with a 50% retracement of the move off the lows.


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