Let's pull the lens back slightly to see the financial and economic picture -- evaluate the investing horizon, if you will.The Dow Jones Industrial Average Wednesday registered yet another difficult day, down 514 points to 8,519.21.
From a technical analysis standpoint the view is not pleasant. The Dow is well below its 50-day and 200-day moving averages, there's not enough buy-side pressure to propel the Dow higher, but the Dow is still not oversold, with a relative strength index (rsi) of 36. This suggests the Dow will move lower, near-term.
The above, combined with likely weak earnings reports for the most recent quarter, are the main reasons yours truly has taken pains to underscore that if the Dow can hold 8,000 until 'normal' credit flows resume, that will be a moral victory.
I'll emphasize again. There's technical support in the 7,300-7,600 range, but not below that, which is why the psychological 8,000 level is important: it's not as strong a barrier as technical support, but it's 'the barrier before the barrier' -- and the goal is to avoid testing the last support, if possible. (The Dow also has technical support at 8,500 and 8,200: we'll see how they fare on Thursday, and moving forward.)
Credit markets: slow but steady progress
Meanwhile, on the credit front, there has been progress: overnight and short-term interest rates are falling. Efforts by the world's major central banks to flood global financial markets with dollars are working. Banks are beginning to lend to banks again, and corporations are able to float commercial paper and sell bonds, albeit at higher interest rates. Whether sufficient consumer and business demand exists, however, for those commercial operations remains an open question.
The consensus among economists is that the U.S. economy is starting to feel the effects of the end of the housing bubble and the unwinding of the mortgage finance bubble -- i.e. that the problem was rooted, by and large, in those misguided subprime / Alt-A mortgages.
Hence, once credit markets are restored to relative normalcy, we can begin to evaluate the economy's fundamentals: earnings, retail sales, industrial output, exports, manufacturers' orders and job growth. And it's those economic fundamentals that will determine where the Dow is headed in the immediate quarters ahead. For now, keep an eye on that 8,000 level.
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