US Market Report – week ending 22nd June 2007
Uncertainty remains in the markets as investors fail to find enough buying incentive to maintain the 12-month upwards trend. There are numerous signs pointing towards this as being the top of the trend, suggesting the coming weeks/months, might lend itself to profit taking and a market pullback.
Many analysts, and for that fact many speculators, have been expecting a major market pullback for some time. The Chinese led “hiccup” of March earlier this year, triggered Bearish analysts to fear for the worse. However, this was a short lived reactionary movement and it was very soon thereafter that buyers returned to the trading floor. In fact, just over a month later and the markets were again trading into long-term high levels.
The current market slowdown is different, however. The broader market not only attempted to form a lower low point, or a break in trend, but in the last week it has also failed to push into new highs.
From a technical perspective, this current market activity is a “non-directional” movement. In other terms, a Consolidation.
There is not a clearly defined directional trend right now, and this could lead to a larger movement either up or down. Our expectations are that a downwards shift is more likely due to numerous reasons:
- Potential Double Top pattern from equal highs in the last few weeks
- The markets have been trending upwards for quite some time, and are overdue for profit taking
- Economic data does not support a “growth” market at this stage, but represents one that is closer to the top of a “boom” phase.
Technical Evaluation …
On the S&P500 index, the rally that had lifted the markets prior to this last week failed to break into new high territory. There was a decidedly strong bearish retracement in the last few trading sessions, dragging the broad market average back towards the recent low point.
At the moment, this would suggest a consolidation pattern. The markets might waver back and forth between buyers and sellers for a few weeks, consolidating until there is enough buyer or seller demand to force a direction.
However, if the markets continue to find selling pressure over the coming week and attempt to break below the recently formed low point (approx 1,490 on the S&P500 index), then this would constitute the formation of a Double Top bearish reversal pattern, suggesting a retracement towards 1,440 would be possible.
Ideally, a market correction would be very suitable to the current markets. With the economy performing relatively well at the moment (unemployment is under control, interest rates are not too high, and inflation has been steady), a market pullback would be a great excuse for more buying activity to occur.
A revision of the Russell2000 index, which has a broader revision of 2000 companies, shows us that there is a lower high point from the recent market activity, but that the upwards trend has not yet been broken.
This is not a confliction to the analysis of the S&P500 index, but it does support the notion that the markets are certainly slowing down into a consolidation phase.
Volatility analysis shows an increase in Investor Fear …
Investor fear has increased over the last week, confirming the outlook for further potential market retracement, almost trading up to the recent levels that had seen investors selling through early June. Therefore, this current market would be considered a better timeframe to be selling rather than buying.
Plaguing investor confidence is the continued worries over Sub-Prime mortgage lending. Over the last 12 months we have seen financial institutions, involved in mortgage lending, and construction companies suffering from a negative outlook in Housing.
Clearly the Property boom of the early “noughties” (the years following 2000), have ended, and we are experiencing a consolidation period that would typically have a negative affect on an economy. In all essence, this could be considered the “Top of the Economic Boom”.
Investors have also been hampered by a rising in global interest rates. The fear that the US Federal Reserve might raise interest rates another quarter percent in coming months has helped fuel the market pullback. But economic data through the week failed to support pessimists, though also failed to entice buyer demand.
The outcome of this line of thinking is drastic for both investors and short-term traders.
Right now, the long-term investor would have been benefiting from strong capital growth in stocks. If the markets change direction over coming months, trending downwards for an extended period of time (maybe even 6-months), then this would diminish any profits that have been made.
Short-term traders should have been bullish up to now. Market trends have been relatively steady and consistent, but a complete directional trade will have the trader changing tactics.
Over the last 12 months, there has been a great deal of Merger & Acquisition announcements throughout the markets. Numerous companies have been taken over by cashed-up companies looking to invest in similar industries as well as to broaden their risk against any future market downturn.
Interest Rate announcement scheduled for Thursday …
Following a quiet week of scheduled economic news, the coming week is likely to give investors much to think about. The following key reports will be released:
| Report | Date | Time (Eastern Standard |
| Existing Home Sales | 25th June | 10:00 am |
| Consumer Confidence | 26th June | 10:00 am |
| New Home Sales | 26th June | 10:00 am |
| Durable Orders | 27th June | 8:30 am |
| GDP – final figures | 28th June | 8:30 am |
| FOMC Policy Statement | 28th June | 2:15 pm |
| Personal Income/Spending | 29th June | 8:30 am |
| Core PCE Inflation | 29th June | 8:30 am |
| Construction Spending | 29th June | 10:00 am |
The most important of reports from all of these is the FOMC (Federal Open Market Committee) Monetary Policy Statement. From the recent economic data, the FOMC will be deciding whether or not a change to Interest Rates is required.
Although it is not likely we will see interest rates declining anytime soon, the desire from investors that rates will drop is also not very likely. Inflation continues to hold above the level where the FOMC would prefer, so we are most likely to find Interest Rates remaining steady for the time being.
On the Earnings front, there are numerous companies scheduled to release earnings reports in the coming week. It isn’t quite earnings season just yet, however, there are a couple of key Construction companies scheduled to report. These include KBH and LEN, amongst other key companies such as MU, WAG, NKE, ORCL, BBBY and PALM.
Direction over the coming week will depend on the sellers breaking support levels from recent low points on the major averages. This would occur on some negative economic news, or even a negative announcement from a key company. But once the markets break their upwards trends and push downwards, investors are likely to follow like sheep and panic sell.
Strategy Analysis …
This is a critical point in time for long-term investors. Protection strategies should be adopted now for individual stocks and portfolios. Put option prices will only increase from this point if the markets retrace.
Option Writers should be very cautious with Put option writing. This is a high risk point in time. Wait to see a market consolidation before entering into Put writing opportunities. However, Call option writers should have entered into their July contracts already. If not, entering into ATM (At-The-Money) contracts should yield better returns for the risk of being exercised.
There is still time for reasonable premium returns to be made from options writing on the July contracts. Traders will need to be thorough in their analysis and evaluation of coming market activity in the next few weeks, ensuring a clear exit strategy is planned.
Short-term traders are between clear trends at the moment. This means the adoption of non-directional strategies for option traders, or patience until the next market trend presents itself for stock or CFD traders.