quarta-feira, 7 de maio de 2008

Is The Crisis Over?

Is The Crisis Over?

Fellow Investor,

There's no denying that April was a really good month for the equity markets. To that I say -- it's about time!

After the worst first quarter in recent memory, stocks finally showed everyone that the bears hadn't taken up permanent residence on Wall Street. Now in the wake of the admittedly very good performance we witnessed in April, many pundits have taken to asking if the credit and equity market crisis is now over.

In my opinion, the answer to this question is a definite no.

I've been around this market game long enough to know that the credit crisis -- which fueled the equity market's decline since July 2007 -- is the result of a lot of years of built up excesses. Being able to borrow 100% of the money needed to buy a home is just one of the many forms of credit excess that has contributed to the market's woes. These credit excesses have got to be fully worked out of the system, and until they are, I fear more tumult ahead -- particularly in housing and financial stocks.

The Federal Reserve has done its best to try and staunch the credit market wound. In fact, the Fed tried again on April 30, once again cutting the cost of capital. The central bank's Federal Open Market Committee (FOMC) lowered the benchmark fed funds rate by 25 basis points to 2%. The FOMC also took down the discount rate by 25 basis points.

Will this rate cut by the Fed be the tonic the credit market and the entire economy need to recover from the widespread downturn we've seen during the past 10-plus months?

Once again, in my opinion, the answer is no.

Because there is an extreme lack of conviction about the state of the economy and the credit crisis operating in the market right now, my advice to you is to approach things here with extreme caution, but with a healthy sense of what I call, "objective optimism."

By objective optimism, I mean now is really the time to rely on the battle-tested, buy-and-sell rules that govern the Fabian investment plans.

Now as you can see by the table of the major market index performances during the past four weeks, eight weeks, 12 weeks and year-to-date (YTD), things certainly have improved. But the real key objective number to watch is the 200DD column. That column represents the price of the index in relation to its 200-day moving average.

This 200-day moving average is crucial to monitor, because if the major market indices can move above that average (into the positive column), it could really be the objective confirmation we are looking for that the crisis is indeed over.

Until that time, however, I think the best approach is objective optimism.

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