| | | |  | We've seen a historical week with a dramatic sell-off. The trigger is hedge fund liquidating stocks to meet margin calls. There is another conspiracy theory that the hedge fund nannies institute the sell-off to pressure the government to rescue. Hedge fund nannies are Goldman, Morgan Stanly, JPM etc who provide trading platform and funding for their clients.
Since the selloff is technical, not directly from grim economic numbers, we can enjoy some relief rally, sending DOW above 10000 at least.
However, we must realize the economy is sliding and next year can be pretty ugly for company earnings. Since stock market is generally forward looking, we are still likely to see lows next year. In the mean time, any bounce is likely short-lived. I am seeing a trading range of 7500-11000 next year for DOW. For 2010, I have no crystal ball.
I am not going to long banks and techs. If you long, be sure to take profit from time to time. Banks still have more defaults coming up, also despite the major banks do not need to worry BK, they have to share profits with government - leaving a smaller pie to share holders. The slow-down in economy will be tough for everybody, but tech may suffer more than others. In lean times, people will buy less and less gadgets, especially the pricy ones. Also, the competition is fierce, the R&D outlay is huge, and the mass-production in the past few years means saturation - everyone has more than one mp3 player.
I'll buy energy since they are oversold and they always have a magical way to come back. Other consumable goods will also fare better than others - like food, consumer staples. The slumping housing price created some nice bargains in REIT, which had been very expensive. Look for those who can sustain their dividends.
It also may be time to think global again, the ones having close ties with U.S. will have some hard time. But I do think some EU countries and Latin America countries will do fine.
As I said before, the downturn will be a slow, grinding down. Mostly it will be mild as US government is running more deficit. Long term, the deficit matters and I don't see an easy way out. The interests of the national debt eat 40% (?) of the government tax revenue. There are no sign that US can pay the debt ever - and the hole just grow bigger and bigger. In one day, the US will likely ask for debt relief from lenders. (Therefore, China need to start to spend the huge reserve now to buy assets.)
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