Though I am not a trader yet, I can give my two cents from an Economist point of view. Seeing from a macroeconomic perspective and listening to Bernanke, the economy will be fairly strong for the next couple of months--meaning it will still be bullish. I don't think the subprime mortgage meltdown will cause too much trouble though it sure is creating a lot of panic among investors. Again, macroeconomically speaking, it is only a small portion of the entire mortgage market. Its impact should not influence the whole market too much (maybe a size of an impact that we had during the New Orleans crisis) The only thing that I'm concerned with is its influence on people. It may create certain expectation shocks, or irrational behaviors by people. That might bring a couple of sell-offs during this period. Or it may even cause a worse outcome. When it hits August, the market will become sluggish. I believe the Fed will then start reducing the interest rate, which is a precursor of a bearish market. The yield curve will be inverted again, which means that short bonds (treasuries) have become more attractive than long bonds (treasuries). Hence, I would advise to buy short bonds before August, and conversely, sell long bonds. Relatively speaking, the treasuries become more attactive than the equity securities in a bearish market. Buying some treasury options wouldn't be a bad idea. I'm not sure what will be most attractive to buy for the next few months. I will probably make my bets on a lot of commodities like gold and natural gas. I will also put some money on some tech stuff until August. Choosing a particular company within the tech industry. I will probably go with Apple and Dell--both are safe bets I think. Apple's shown a great trend and a great earnings growth. I will also choose Dell because I think Michael Dell will turn the company around. By the way, they had a good day today. Probably, Ebay and Yahoo wouldn't be too bad either. I wouldn't make radical bets that may have huge volatility during interviews. Anyway, this is what I think. An opinion from an undergraduate economics major. Feel free to rip me. I would like to hear others' opinions.
If we're going to have a bearish market I don't think it would come from people being negatively influenced and being more conservative, it would come from the bull run ending for many different reasons. Last week the thought of lower interest rates shot the market up, overall the market has recovered well from the corrections and looks to be chugging along. What is going to stop this market if it's not the sub-prime crisis? It's not going to be 'consumer sentiment', in fact they have nothing to be afraid of if the economy is still healthy, because the bears are certainly not winning right now. That's why I think the sub-prime is still key, the market will follow it and if it gets worse or spills in the economy, it could get ugly. Then if Fed might drop rates by surprise and countries like China slow down their economy we could have bear market. This correction is also key overall to whether the bull run with be strong going into the year. JMHO, from another economic undergraduate. Feel free to flame.
I agree that the market will become bearish due to the bull market coming to an end. I believe that we are right in the middle of the eight-year cycle and that a bear market should come during this summer. I do not agree that the thought of lower interest rate shot the market up last week. In fact, Mr. Bernanke came out and said the Fed wouldn't lower the interest rate. If the Fed lower the interest rate, the equity market would rather go down instead of going up because it would mean that a bear market had come. At any rate, Mr. Bernanke made his announcement; people's expectation changed and the yield curve naturally became flat. The market recovered because of Bernanke's announcement, which conveyed the idea that our market was still bullish. Prior to his announcement, people expected the Fed to lower the interest rate (expecting a bear market to begin), and hence, we had an inverted yield curve for awhile. Regarding the subprime crisis, I will spell it out for you. It is only a small portion of the whole economy. It cannot possibly affect the economy unless it changes people's sentiment and create a panic--making an expectation shock. Now that would bring sell-offs in the equity market, and that may create a domino effect. But I don't think we will come to that point because Bernanke will come in and make another announcement. All he's been doing is just that. Telling people that the economy is strong, inflation rate intact, and GDP growth rate higher than expected. He's also mentioned that the subprime mortgage meltdown is only a minor factor. By the way, the Fed will never make any surprise changes because it will lose its accountability. That will be the worst disaster since Miller was the Fed chairman. Volcker had to work his ass off in order to rebuild the accountability that Miller lost.