US Market Commentary – week ending 4th April 2008
The jury is still out as to whether or not the
Nearly all of the activity for the week occurred on Tuesday. Monday’s markets were able to break a 3-day negative run, but Tuesday’s activity was a strong push from buyers who were accumulating stocks heavily. Activity for the remainder of the week was non-directional, however, despite impacting reports and announcements.
The catalyst for Tuesday’s rally hinged on the finance sector (again). UBS reported that they were expecting $19 billion of write-down for the 1st quarter, with a loss of $12 billion. Shortly thereafter, DB also reported expectations of a $3.9 billion write-down.
Investors were keen to buy up finance stocks, despite the fact that this really is negative news. The sentiment behind the buying activity: that although this is negative news, that is “should” be a sign that there will be no more write-downs for these companies.
That’s a pretty weak excuse!
Tuesday’s activity did follow an announcement on Monday from Treasure Secretary Paulson who announced a plan to “overhaul” the
With the markets hovering sideways for the second half of the week, one might think there wasn’t much news activity. However, there was plenty.
On Wednesday, Federal Reserve Chairman Ben Bernanke addressed the Joint Economic Committee, stating “real GDP will not grow much, and might contract”. Investors weren’t too happy with this statement, but then again, this isn’t anything new to anyone. Clearly the impact of the finance sector, housing credit crunch and slowing economy are going to have an affect on leading economic indicators.
Majority of investors spent the second half of the week waiting for the March Unemployment figures. As we have been expecting, in light of the poor economic balance, Unemployment gained in March. It rose from 4.8% to 5.1% and has some analysts suggesting that this may actually be a sign of a Recession.
There are many articles circulating at the moment that are comparing this latest unemployment report with the figures at the end of the last Bear market (early 2003). Higher Unemployment puts pressure on an economy, especially at a time when there is high credit risk amongst consumers. With more people out of work, with companies struggling to meet profit expectations, and a finance sector in dire troubles, we could find that Unemployment only increases over the next couple of months. To read more about the impact Unemployment may have on the current markets, CLICK HERE for an article from Economist.com
Mixed Technical signals ….
A stagnant market over the last 3 trading days could be a sign of a short-term high forming.
The S&P500 index has rallied to 1,370 over the last 3-weeks, after reaching a bottom around 1,270 – a gain of 7.8%. Since then, we have seen a short-term higher low point and higher
However, the medium-term trend is not yet broken. And that leaves traders with a sense of uncertainty. The markets could swing in either direction right now, and no-one would be surprised by the move. Strong buyers on Tuesday have failed to find follow through activity, yet we haven’t seen the selling pressure that would otherwise denote weakness from those buyers.
The current market activity is trading just below the previous lower
Should the S&P500 index break below 1,330, it is likely that the market could retrace further back to the long-term lows of 1,270. However, continued buyer activity or the forming of another higher low point is a strong signal that markets could be attempting to change trend.
A quiet economic week ahead ….
Investors will be given a break in the coming week, with few economic reports scheduled for release. However, there are still a couple of announcements that must be monitored carefully.
Tuesday will be the day to watch with Pending Home Sales figures scheduled for release shortly after market open, and later in the day, the FOMC (Federal Open Market Committee) Minutes from their March meeting.
Both are key in the current economic climate due to the volatile aspect of investor reactions. Expect negative numbers on Pending Home Sales as this sector has failed to produce enough of a increase in sales to warrant a change. And there shouldn’t be anything surprising in the FOMC Minutes as most of the information has already been reported.
Investors will be looking for a hint from the FOMC that interest rates will be lowered at the next meeting in April. So any wording towards this will be viewed as a positive and could lift the markets.
Earnings season begins on Monday ….
Investors beware! Earnings season is upon us yet again, but this time it is likely to have a major impact on market confidence.
Earnings season officially begins with AA reporting after market close on Monday. We have already seen a large number of earnings estimates cut for the finance sector, but it will be the impact on the broader market that analysts will be watching carefully.
We will list those companies we believe could have a major impact on market behaviour, and update on those that have influenced the markets.
| Monday | |
| AA | Time not supplied |
| | |
| Tuesday | |
| Nil | |
| | |
| Wednesday | |
| BBBY | Time not supplied |
| CC | Time not supplied |
| | |
| Thursday | |
| Nil | |
| | |
| Friday | |
| GE | Before Market Open |
The first week of the season is typically quiet. Reporting activity will increase substantially in the following weeks.
Option Volatility decreasing ….
For market investors, some positive analysis is beginning to creep back into the fold. The CBOE Options Volatility index has decreased over recent weeks, suggesting there is “less fear” in the markets at present.
The VIX index is referred to as the “Investor Fear Gauge”, and when it is trading high, the markets are typically falling.
Pressure has eased, but not sufficiently to negate all risk assessment. There is still a reasonable potential that selling pressure would be invigorated on even 1 poor announcement from a key company. For this reason, remain very cautious.
Market Outlook ….
It is surprising that sellers did not react more predominantly on the Unemployment data, or on finance announcements earlier in the week. It may be that sellers are literally exhausted at the moment, and that buyers see this as too much of an opportunity to accumulate stock at good prices.
Or, will it be a delayed affect?
Technically, and fundamentally, there is good cause for us to find sellers into the next week. A hovering market will not remain long, and we have experienced 3 trading days with no market direction into the end of the last week. This activity is similar to the previous lower
The greatest concern for any investor evaluating current conditions is the volume. To break the negative mould and give buyers a solid opportunity to drive upwards, we need to see a strong increase in average volume. Especially on those days where buyers are dominant.
At the moment, however, volume levels are average (at best), and do not reflect the change that is required to break the trend. To compare, the amount of selling activity that occurred in late January when the markets fell heavily is almost a third greater than the current numbers.
Be cautious with any upwards continuation. It is safer to remain on the sidelines, than to be caught buying stock into a false upwards shift.
Strategy Analysis ….
Traders: Confirmation of a Bearish reversal pattern on the daily chart of the S&P500 index should signal entry into Bearish trades. We suggest looking at the weaker sectors such as Construction and Finance.
Option Writers: There are 2 weeks left until options expiration of the April contracts. Maintain portfolios for now, in preparation of evaluation next week ahead of expiration. Writers should have their portfolios weighted to Covered Puts at the moment, with very conservative exposure to Covered Calls, and no exposure to Naked Puts.
Investors: Weakness in the second half of the last week suggests a lack of buyer strength to change market trend. Therefore, monitor the short-term activity for any pullbacks, using this as an opportunity to accumulate stock.
