Stock Market Analysis

Sunday, January 30, 2011

Chinese New Year Week

What was shaping up to be a positive week last week ended up with a huge ditch on Friday, closing the Dow down -0.41% week on week.

Even though GDP didn't beat consensus last Friday, it was still very impressive and pointed towards strong economic recovery and should not have spurred the strong sell off. Consumer sentiment later last Friday also extremely strong and beat consensus. Consumers are the backbone of the US economy and happy consumers definitely lead to a happy economy. So, what really happened last Friday? Why did the Dow drop 166 points in a single day?

First of all, lets put matters into perspective. 166 points drop in the Dow on a single day isn't a big deal. On days where there are truly huge market driving bad news, the Dow typically drops anything from 200 to over 300 points in a single day. Secondly, such 100+ points single day drops are normal "breathers" in every bull market. Just look back at the numerous such single day drops in the past bull trends. In fact, most of such drops recover almost the very next trading day, as such, we should not read too much into such single day drops. Single day drops only sound an alarm when the following trading day remains red. It is then we need to make a reassessment of the situation and see if there is strong evidence that the market is turning around significantly. Currently, there is no evidence that this single day drop means anything more than a healthy breather leading to higher highs.

This is also Chinese New Year week. Chinese New Year does not affect the US market like Chrismas and New Year Day does so traders should not be overly concerned. This is the first week of February 2011 and we are getting those heavyweight economic data once again. Monday's Chicago PMI would shed the first light on how Tuesday's ISM index might turn out. Generally, consensus is mirroring the current volatile economic data period and is expecting some pretty volatile results as well. This is the period to take a longer perspective and survive the short term volatility.

Here's wishing all my Chinese readers a very happy and prosperous year of the Rabbit! Gong Hei Fat Choy!
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