Working off Excess

One of the functions of an efficient market is to work off excesses. Though the US equity markets are far from perfectly efficient, that process began yesterday and continued, though somewhat fitfully, today.

Dow 13,766.70 -48.86; NASDAQ 2,654.29 -12.19; S&P 500 1,518.75 -10.28; NYSE Composite 9,936.47 -34.43

The excessive buying and short-covering from Tuesday and Wednesday morning were being dutifully expelled on Thursday. As soon as options expire on Friday, the market will regain its senses and continue back down. There simply isn't a meaningful catalyst to send the markets any higher. In fact, they are already overvalued.

Declining issues held a 5-2 edge over advancers, though new highs remained ahead of new lows for now, 221-122.

The absurdity in the oil business certainly isn't a positive. Crude for October delivery leapt to another all-time high of $83.32, gaining $1.39 on the day. Also showing signs that the economy is a serious mess, gold gained $10.40, approaching the interim high at $739.90. Silver was also up 37 cents to $13.47.

Credit markets are still in a shambles worldwide and many more homeowners will face foreclosure the rest of this year and through 2008. Stocks are being kept afloat by inflation and fear alone. Soon, the true direction will be found as the economy flounders into recession, despite the jawboning and rate cuts from the Fed.

The close of the week should bear witness to late-day selling as investors are still not convinced that US equities are all they're supposed to be. Earnings season is less than two weeks away. Get ready for some major movements.