US Market Report – week ending 14th Sept 2007
Buyers were present through the last week, but not convincingly. Although Blue Chip stocks posted a conservative rally, the broader market was not so strong. A Jewish religious holiday saw volume levels down for 2 out of the last 5 trading days, while fears have not completely subsided over the Subprime lending activity.
Investors appeared to be conservative all week ahead of the FOMC’s (Federal Open Market Committee’s) Monetary Policy meeting this week. On Tuesday at 2.15pm, the FOMC will be releasing their statement on Interest Rates, and although majority of investors are keen to see a lowering of rates by a quarter percent, there is still a great deal of uncertainty.
Supporting investors is the fact that the Subprime crunch has clearly slowed the economy down. But has it slowed enough to warrant a decrease in Interest Rates? FMR Analysts are not expecting a lowering of Interest Rates at this point. The reasons being that Inflation is yet to slow and fall back within the target range of the Fed Reserve, and although the economy has slowed slightly, there has not yet been enough data to confirm that the economy is slowing significantly to require an “incentive” from the Fed Reserve.
Two key pieces of economic data will be released this week to establish the depth of economic slowing. Before market open on Tuesday is the PPI (Primary Price Index), which measures prices of goods at the wholesale level. However, CPI (Consumer Price Index), which measures prices of goods and services purchased by consumers, is scheduled for release before market open on Wednesday, after the FOMC Monetary Policy statement.
Because of these 3 scheduled economic statements, investors and traders should be looking towards a very volatile mid-week. FMR Analysts are expecting wild reactions to statements. Some investors will be disappointed while others will be elated. No matter what the final statements are, investors are likely to react strongly.
On a side note, but also just as important, Housing Starts and Building Permits data will also be released before market open on Wednesday.
Volatility remains high ….
Despite a mild rally on the major averages through the week, the CBOE Volatility Index (VIX) remains high, though losing a few points by weeks end. The VIX is considered the “investors fear gauge”, and is used to measure the probability that the markets will fall.
This index has been trading at high levels since before the recent market correction began. At around 25 points, it is still trading well above the levels that denote a steady Bullish trending markets.
Of course, if the markets were to rally over the coming week, we would see this index fall significantly. However, FMR Analysts are not expecting a fall in this index any time soon.
Blue Chip index finds buyers, but broader market a little less convinced ….
As we had mentioned in our opening paragraph, the DOW Jones Industrial Index appeared quite Bullish through the week. It rallied to its previous
It would appear that the DOW is trading in a consolidation range. This weeks economic reports will be pivotal in providing an upwards breakout of this resistance, or maintaining the consolidation pattern.
Technology stocks have proven more Bullish in recent weeks, though have also lifted the NASDAQ index to be trading near its recent short-term highs. If any sector were to find buyers and continue to rally over the coming weeks, it would come from the Technology markets due to the resilience they have shown in light of the recent market correction.
FMR Analysts have made mention of the relationship the S&P500 index has with the Financial sector over the last couple of months. Normally we use this index as our benchmark for market performance, because it encompasses the majority of stocks that we analyse, trade and invest in.
However, the Financial sector posted a rally this week which skews the data of the S&P500 index. For this reason, we will use the Russell2000 index as our benchmark for market performance.
The Russell2000 index failed to find the same level of buyer strength as the DOW Jones. It consolidated almost sideways through the week, and is trading midway between its short-term resistance and long-term support.
This proves a dangerous market period as we could find buyers or sellers entering on mild news announcements. At FMR Analysts, we are expecting the FOMC report on Tuesday afternoon to be the catalyst for this index to shift.
4 Leading banks to report earnings in the next 2 weeks ….
Causing investors to 2nd guess their market expectations is not only the FOMC report on Tuesday, but the fact that 4 leading banks will be reporting their 3rd quarter earnings announcements over the next several days.
GS, MS, LEH and BSC will all report earnings. The significance of this hinges on the affect Subprime Lending has had on their profitability over the last couple of months. There is a strong potential that these companies may miss their expected earnings results, which would drive their stocks down. This in turn would affect sentiment, and send a ripple affect across the markets.
In the
The cashflow crisis stems from the Subprime Lending concerns which have seen banks reluctant to lend to each other. Hence the Bank of England has injected cash into the economy.
The US Federal Reserve has done the same, but to what affect will this have on the economy over the medium to long-term? It might help bolster cash reserves now, but it does not negate the Subprime problem.
For the 4 major banks that are scheduled to release their earnings data, they have suffered heavily due to the market correction. BSC had 2 Hedge Funds recently collapse! The depth of how much the recent market activity has had on the Financial sector, hopefully will be a little clearer within the week.
FMR Analysts Outlook ….
Last week we had expected some consolidation, but to be followed up with further selling pressure. Buyers were much more predominant through the last week than we had expected, but were still not convincing.
This week, however, will be solely controlled over economic data and the markets reaction to the 4 leading banks reporting earnings data.
Monday and Tuesday could be relatively mixed ahead of the FOMC statement Tuesday afternoon. Do not be surprised to find mild buyer influence following last week, or even to find profit takers looking to exit positions ahead of the FOMC statement.
Direction for the rest of the week will purely depend on the market reaction Tuesday afternoon, Wednesday morning. It is too difficult to weigh up the probability of a directional shift for the latter stages of the week as there are strong expectations either way.
With this in mind, investors and traders should have a plan for either scenario.
FMR Strategy Analysis ….
Now is not the time be entering into new positions. Market volatility is likely to increase, while probability of direction remains very uncertain.
Bulls: Positive news means stocks are likely to rally and positions will begin to recover the August losses. If Interest Rates are lowered at least a quarter percent, investors will cheer! This will drive a buying frenzy that is likely to trigger a new medium-term trend as the major averages break through resistance levels.
Bears: If the markets continue to push downwards, then it will be due to Interest Rates remaining steady and/or a very poor performance in the leading banks for the 3rd quarter. This is likely to lead to further selling activity over the short to medium-term.
Investors: Hold current positions and evaluate market activity at the end of the week. An upward break of resistance levels on the S&P500 could mean accumulation of stock positions. But be cautious not to accumulate stock until you are confident the Financial sector has shown there has been minimal blow-off from the Subprime factor.
Traders: It is highly speculative to be expecting a directional move at this stage. The markets could move in either direction by Wednesday, so any short-term positions should have exit points established, and if the markets shift in the opposite direction, exit upon market announcements.
Option Writers: It is the last week of trading for the September option contracts, and with pivotal market news this week, you will need to monitor positions a little more closely heading into the end of the week. Remember, if you do not want positions to be Assigned/Exercised, you will need to close the position before the end of trading Friday. Writers could be considering new written positions over the coming week for the October expiration, but due to the volatility of the current markets, it may be safer to evaluate these positions with the general market activity towards the end of the week, rather than the start