US Market Report – week ending 29th June 2007
The middle of the year has passed, and investors failed to give any direction to the markets over the last week. The Consolidation patterns that were appearing from mid-June have been confirmed, although Volatility has begun to increase – suggesting investor fear is still a little high for now.
Over the last few weeks, the markets have generally retraced as profit taking held the markets back from pushing into new long-term high levels. FMR Analysts had reported this activity with a ‘potential’ Double Top reversal pattern on the S&P500 index – one of the benchmark indexes for direction of the
Investors had failed to push the markets higher through the middle of June, with the S&P500 index stalling at the same
As the markets began to retrace, the S&P500 approached 1,490. This level had been identified as a mild support base, but if breached, would denote a change in trend conditions for the markets as a whole. This would also confirm the Double Top reversal pattern, and our expectations would be for a retracement towards 1,440 on the S&P500 index.
However, the downwards break was not to occur in the last week as buyers found enough stability to hold the markets somewhat steady. But this is not to say that we should be expecting a market rally just yet.
Wednesday produced a strong market rally that lifted the S&P500 index. As there were few economic reports scheduled for release that day, it is likely a representation of relief after 3 trading days of falling markets. What buyers really needed after Wednesday, however, was continued buyer demand to confirm buyer dominance and gather momentum to lift the markets into new long-term highs. This did not occur as economic data caused some fear amongst investors, and produced weak daily movements that were predominantly controlled by sellers.
An Economic driven week …
It was an extremely busy week for economists. To start the week, Housing data again showed us that the Housing Boom is well and truly over. Existing and New Home Sales figures were slightly lower than market expectations, and this caused some selling amongst Construction stocks. Sub-prime lending concerns are also continuing to plague the Financial sector, and if continued slowing in housing continues, then this could have a drastic affect on the
Consumer Confidence has continued to fall, with June figures representing an index value of 103.9, down from 108.5. Any change that is greater than 5 points is considered significant, and Junes figures only just fell short of that with a 4.6 point decline.
More importantly, however, was the release of the GDP final figures, and the release of the FOMC (Federal Open Market Committee) Monetary Policy Statement on interest rates.
Both reports were released on Thursday the 28th. GDP final figures were released before market open, falling slightly short of analyst expectations of 0.8% with a result of 0.7%. This figure is an annualized percentage change reflecting the total economic output.
Economists were expecting a rise to 0.8% in the final figures for the first quarter 2007. The 0.7% figure is an increase of 0.1% from the initial figures released in May. Economic growth in the
As this figure was ahead of the FOMC’s policy statement on interest rates, it confirmed to many analysts that it was more likely that interest rates would left unchanged.
So, later that day, at 2.15pm, the FOMC released their monetary policy statement and did leave interest rates unchanged. However, changes to the wording of their statement caused fear amongst investors, and this caused the markets to lose value into the end of the week.
FOMC Chairman Ben Bernanke announced “.. sustained moderation in inflation pressures has yet to be convincingly demonstrated”. Meaning, the battle over inflation is not yet over!
Many investors had been hoping there would be an easing in interest rates through middle, and into the end of 2007. But a statement such as this is not likely to give investors what they want.
A positive outlook for the Bulls came when Bernanke stated that core inflation had “improved modestly in recent months”. A change from their previous statement of “somewhat elevated”. And so it could be a few more months before investors get a peak at any potential of interest rates being lowered as the Fed has clearly stated improvements, but not enough to warrant changes just now.
Volatility increasing = Rising investor fear …
All this back and forth activity has led to the Volatility index increasing through the end of the week. The VIX index is referred to as a gauge on investor fears, and as it increases, there is more of a likelihood that the markets will fall. When it is trading lower, the markets typically trend upwards.
With a rise in the VIX through the end of the week, investors and traders must begin to think about what potential there is for these markets to break downwards. Even if it is just a reactionary movement that bottoms out before too long, and then resumes a new upwards trend.
Clearly we have a lack of buyer demand across the broad market as the major averages have failed to push into higher territory, with numerous economic factors suggesting a weaker economy as well. It is likely that any mild negative economic impacts will have a much larger influence on Bearish activity than it would normally have.
One factor that is sneaking under the radar at the moment is rising Crude Oil prices. On Friday, Crude Oil closed at $70.68 a barrel. This is its highest price since Aug/Sept last year where it had peaked just under $80 a barrel only weeks before. Peak summer drive time is now approaching, which means consumption is likely to increase significantly as well.
FMR Analysts Strategy Outlook …
FMR Analysts have taken the outlook that for Bullish investors, protection or profit taking is the approach that should be adopted at this point in time. Especially for those investors who have produced strong profits from the Bull market over more recent years. These strategies include:
- Closing positions (check your personal tax situation before doing so)
- Purchasing medium to long-term Put options to protect your stock position (against any bearish market activity)
- Purchasing medium to long-term Index Put options to protect your portfolio(against any bearish market activity)
- Write Covered Calls to produce additional income and potentially close stock positions at a designated price
- Begin loading your portfolio with protected, or conservative, Bearish positions.
Short-term traders and scalpers are likely to find the current market conditions a little more difficult to profit from. There is no clear directional trend on the major averages due to the larger Consolidation patterns that have formed.
This is a sideways market, which is not suitable for short-term directional trading. Volatility strategies, and for Option traders, Straddle positions are more likely to be beneficial until we have a clear break of the consolidation.
Market Outlook …
The markets are at a pivotal point right now.
For the
However, towards the end of the week, monthly Unemployment data will be released on Friday. This is one of the key economic indicators and will have an influence on market sentiment/direction.
Because the major averages are holding on support in a Consolidation pattern at the moment, the certainty of directional activity is much lower. Volatility analysis suggests there is increasing fear amongst investors that could lead to a downwards market break. But don’t go jumping into the markets too early. Ensure there is a confirmation that sellers are dominant before changing your market view to Bearish.
