Market Summary

Friday's controversial late rally allowed the large cap indexes of the DJI and S&P 500 to close higher for the week, while technology and small-cap stocks, as represented by the Russell 2000 declined. For the week, the DJI and S&P 500 gained 0.27% and 0.23% respectively while the NASDAQ slipped 0.79% and the Russell 2000 lost 0.87%.

Friday's action showed again how difficult it is for the non-professional trader to profit in this market. Massive intra-day swings in just a few minutes like we saw on Friday, and have seen several times in the last few months, bring suspicions of market manipulation and a loss of confidence that the markets are indeed 'free'.

Friday's recovery was sparked by a speculative report on CNBC that a bailout of bond insurer AMBAC was possible early next week. The plan is similar to others floated previously that separates the profitable municipal bond business from the risky, and loss making, securitization business. While this is potentially beneficial to the municipal borrowers who will be able to get more reasonable rates on the bond issues, it is problematic for the securitization component because unless enough liquidity becomes available to back the insurance obligations, financial institutions face more writedowns because the insurance on their mortgage-backed bonds become less valuable. Other bond insurers are expected to adopt a similar restructuring. If a resolution is not achieved early next week, then we can expect another sharp sell-off. Even if a restructuring is achieved, it seems unlikely to resolve the underlying insolvency of the mortgage-backed insurance business. The New York Times reports that AMBAC hopes to raise $3 billion but Bloomberg reports that AMBAC faces losses on $566 Billion in debt and the banks risk losing $70 Billion if AMBAC loses its AAA rating.

The following chart of the NASDAQ Composite is fairly representative of the market as a whole now. Volatility has lessened and volume has fallen below the 50 day moving average which was elevated by the high volumes in mid-January. The Bollinger Bands have narrowed as the index trades within a narrower range. This indicates a consolidation is in progress and a breakout to the up or downside is possible. The most likely outcome, however, is break to the downside that will test January's lows due to the underlying financial system woes.

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