- We need to hold technical support. Currently about 8,000 or so on the Dow (give or take). If we fall through this level (in any significant way), then we have major problems.
- We need to be certain that the government will provide support to the banks, and that the banks' common won't be wiped out (regardless of the form of the bailout). As the new administration settles in, it's becoming clear that despite more severe restrictions, TARP II is unlikely to crush the equity. Still, there will be resistance in Congress, and our leaders will need to posture and "not be rushed", so decisions will take. In the absence of positive forward momentum, we can expect continued pressure on the market.
- The current round of writedowns, losses and layoffs in Q1 and Q2 of 2009 will not lead to major losses in excess of what we saw in October through December of 2008. The beginning of 2009 will see major layoffs; bankruptcies; companies with debt due in will be in trouble; losses in commercial real estate, credit cards and auto loans. At the moment, I'm inclined to believe that the beginning of 2009, as bad as it is, will not be worse than Q4 of 2008 (when the Dow went from 11,000 to the 8,500 range.
- International events may pressure US stocks. Nationalization of banks in Europe, disruptive behavior from Russia, continued Arab-Israeli fighting or Iranian intransigence could all pressure US markets. Still, US markets are likely to see themselves as relatively insulated from these world events. I'm inclined to agree, because severe spillover is unlikely. In other words, international events will affect US markets, but they will not drive US markets. (For example, if the Brits nationalize a few banks, it's unlikely that the US will follow suit. The Obama administration has not indicated that it favors nationalization).
