A new NBER paper reminds us of historical episodes when loose monetary policy contributed to asset price booms and busts. On the other, the GDP is faltering, housing starts and prices have reversed, median family income was going down, the War in Iraq was in trouble as was the War against Terror, and America was becoming isolated from its allies. Now, there isn’t anybody who could have known at the time, but that local high followed by the local low was the left-shoulder of a Top Head-and-Shoulder formation pattern that is recognized as a rather bad sign in technical stock market analysis. The short-lived upswings you see on Chart 8 in this period are brief profit-taking episodes.
Author’s note – I actually remember when the above statement and Moody’s assurances were put out.. The stock market rose accordingly the next few days until August 6 when word began leaking out that both Countrywide and Moody’s were rethinking their position. For example, the stock price crossing above the 50 Day Moving Average for AAPL has a success rate of 70%, but for XOM it is 41%.
ASIDE: Following the low reached on Oct 24, 2007, resulting from lowering home prices and spiking oil prices, the end of October saw good earnings reports from America’s businesses AND another rate cut from the Federal Reserve, that drove the market up to a local high on Oct 31, 2007 given it fell back sharply the next trading day. Note, from Chart 8, this high was not as high as the market high on Oct 10, and, in fact, is about as high as what I identified as the Left Shoulder in the previous Aside.
However, because this happened so close in time to the market high, technicians will be looking for a confirmation, although they will now be taking precautionary steps to exit the stock market should things start to go south. Back On Point: There is no good news any more other than corporate earnings, they still seem to be strong, except in the financial sector; only because the full impact of rising oil prices have not been felt yet.
The economy is now all about the housing market, the stock market, and the credit market; it is clear to all now the former has collapsed, it is just dawning on those in the know that the latter is going to collapse, and the stock market is finally acknowledging that fact. In April 2008, America, especially those invested in the stock market are looking for any good news, and when they hear it, stock prices soar.