US Market Report – week ending 17th August 2007
An extremely volatile week had investors’ nerves hanging by a thread. Markets plunged on further fears of Subprime negativity, as European banks announced their exposure was greater than first anticipated.
Leading investment firm GS announced they had greater exposure to the Subprime lending market, sending their
The Financial sector has been the driving factor behind the recent market correction. There are real fears from analysts that this sector could continue to be a major drag on the US markets over coming months, especially when the dust begins to settle from the recent activity, and analysts begin to take stock of which mortgage lending companies, and for that fact, which Financial institutions, are strong enough to ride through any future negativity.
Because the Subprime effect has been building for more than 6-months, it is not likely that this will be the end of its influence. If there are continued increases in defaulting loans, Financial Institutions who have exposure either through Hedge Funds or through direct investment in mortgage lending, will be hit hard.
Economic data fails to lift investor sentiment ….
With key economic data released through the week, investors would have been hoping for relief that there has been an economic slowdown. This would influence the Federal Reserve to hopefully decrease Interest Rates at least a quarter percent, easing the pressure of a falling stock market.
PPI (Primary Price Index) data released on Tuesday suggested a relatively steady month. It rose a mild 0.1%, which is a decrease from the 0.2% rise in May and the 0.3% rise in June.
CPI (Consumer Price Index) data, which is considered the key economic announcement to measure Inflation, was then released on Wednesday. It was a “tame” read on Inflation with CPI coming in at 0.1%, just below economists expectations of 0.2%, while Core CPI met expectations of 0.2%.
End of week rally may just be short coverings ….
As the week drew towards an end, there was a strong rally in the
It would be too early to be calling a return of the Bulls, so this coming week will be a cautious period for investors. Numerous analysts have discussed the possibility that the end of week rally was Short Sellers, or Bearish traders, closing out their positions. If this is the case, expect a weak rally to top out and find sellers back in the markets soon.
Volatility reaches a new long-term high – again ….
The VIX indicator, the benchmark of market volatility and known as the “Investor Fear Gauge”, peaked at 37.50 this week. This is its highest level since before the 2000 market crash in Technology, reiterating the extraordinary conditions we are experiencing at the moment.
Although the index has pulled back from this high, it is still trading at levels that suggest there is a great deal of fear amongst investors. Until this indicator has recovered back below 20, our outlook will remain one of extreme caution.
In fact, depending on your own level of nervousness with the current markets, any ensuing rallies in the coming week might be an opportunity to exit positions and bank those profits. If the markets continue to rally, these positions can always be re-entered.
Technical Downward trends are now established ….
The major averages have now confirmed downward trends with lower high points and lower low points. This includes the DOW Jones Industrial Average, NASDAQ, S&P500 and Russell2000.
We define these as medium-term trends due to the time frame. They have broken the previous upward trends that began in March following the global market “hiccup” instigated from the Chinese markets.
For now, analysts aren’t calling this a “Correction” as the major averages have not exceeded 15%. Until recent years, a market correction would be denoted by a 10% fall on the major averages, but due to increased volatility in the last 10 years, 15% has become the more established benchmark to consider.
If we find the markets falling 15% over the coming month or so, it would be highly likely that a Bear market would be established. At this time, expect selling pressure to fuel the trend. However, FMR Analysts are not expecting a Bear market at this stage, although we do see this current market correction as potentially holding on a little longer.
Global Federal Reserves putting more cash into the system ….
Through the week, Federal Reserves in Europe and the
This was welcomed by economists who were afraid that the massive defaulting on mortgages might lead to a lack of cashflow. Whether it will be the answer to stop this market from turning Bearish will only be seen over time.
The Federal Reserve was also instrumental in inviting buyers back into the markets with their decision to lower the discount rate. The rate at which the Fed Reserve lends to banks was lowered to 5.75% from 6.25% and is a sign that credit pressures are easing.
Investors are still wanting a decrease in the Federal Fund rate, which they left unchanged at 5.25% at their latest Monetary Policy meeting the week prior. While Inflation remains above their target range, the Fed is not likely to lower Interest Rates. If Inflation eases because there has been a slowing economy, only then might we expect a lowering of the Cash rate.
FMR Analysts Outlook ….
With a medium-term downwards trend defined, and with the strength of sellers through last weeks markets, it is far too early to consider a market recovery.
The best the markets should be hoping for is consolidation. In fact, consolidation would be ideal. Even though investors would be wanting a market rally, it would be too early for confident buyers to enter the markets and push the major averages back up to their recent highs.
Investors need the markets to consolidate so that buyers can build up their confidence and desire to want to buy shares. Then, an upwards break would instigate further buying activity.
There are very few economic reports scheduled for release this week, and fewer key earnings reports from influential companies. Investors are therefore likely to be taking stock of their portfolio, and whether or not to ride out this recent volatility. Therefore, a week of consolidation, with only mild volatility, would be ideal at this point.
Strategy Analysis ….
Last week we had mentioned that if there was consolidation that this could be a good time to enter into Option Writing positions. We have not seen consolidation through the last week, and therefore, it is not time to be entering into option writing positions.
Investors who had taken Put protection on their portfolios, or individual stocks, should continue to hold this protection for the time being. If you have not taken protection at this stage, look for the opportunity to purchase Put options, or Index Put options this week as selling pressure has eased slightly.
Short-term traders will be looking for a market to stall and create a short-term Bearish signal. If this market continues to fall in the coming week, it will have a major affect on global Funds, and this is likely to fuel selling activity. If sellers fail to control the markets into the end of the week, then monitor market conditions