US Market Report – week ending 21st September 2007
It was a big week! The FOMC lowered Interest Rates by a half percent, Financial bigwigs produced a positive outlook for 3rd quarter earnings, and Crude oil punched through its all time high to trade at levels never seen before!
Investors were given exactly what they wanted on Tuesday when the FOMC (Federal Open Market Committee) lowered Interest Rates by a half percent to 4.75%. The reason: to help boost economic growth in light of the flailing credit risk in the country.
Clearly the economy has slowed due to the Housing market and the flow-on affects. Investors had been screaming for a lowering of interest rates to ease the burden of risk that they are carrying, and the FOMC finally gave in.
This action means consumers will have more money in the pocket due to lower interest repayments, and hopefully will help prop up the economy – which is going through a cash shortage due to the increased risk of lending between banks due to the whole Subprime lending activity.
The question on many analysts minds is whether or not this will be enough?
Outside of the Housing industry and the continued risk that the Financial industry is carrying with subprime lending, the economy is not fairing poorly. We wouldn’t say it is running forward in leaps and bounds, but it is holding well.
In particular, the Technology industry is booming! Unlike the turn of the millennium, when the Tech Wreck caused a Bear market across the economy, Technology now has substance. All the companies that had little to offer but dreams and promises are all gone! Companies like GOOG, AAPL, MSFT and IBM have survived and continue to grow at alarming rates.
Supporting the bullish activity of lowering interest rates was key economic indicator reports. Both the PPI (Primary Price Index) and CPI (Consumer Price Index) data was released either side of the FOMC announcement.
The PPI data decreased significantly more than economists were expecting. This was ahead of the FOMC announcement, so by days end was overlooked by many. But it reflects a slowing in prices of goods and services at the wholesale end.
CPI data came in at -0.1%, compared to a -0.2% figure economists were expecting. However, with wholesale prices slowing significantly in August, the affect of this is likely to adjust CPI figures for July when they are released in a months time. Watch this space!
Volatility easing ….
Easing investors’ concerns is reflected in the VIX – the Volatility index also known as the Investor Fear Gauge.
The strong upwards drive on Tuesday, when the Fed lowered rates, has helped the VIX fall nearly 30% over the last week. It last traded at 19 points – its lowest value since late July.
We now see the VIX trading back at levels that would suggest there is potential for continued upwards movement in the markets. Surely there are concerns that the “Credit Crunch” felt through the Financial industry could produce some worrying numbers, but for now investors are looking for bargains – and there are plenty!
Financial stocks help hold a bullish sentiment ….
Apart from the lowering of interest rates, dominating the news this week was the release of earnings details from leading Financial institutions.
LEH and GS both produced better than expected reports, while MS missed by a mile. Still, the reaction from investors was overwhelmingly positive as the perception is that the subprime fallout, though affecting some aspects of the industry, is not a debilitating factor for leading companies (yet).
FMR Analysts remains cautious for this industry. We expect there could be further negative repercussions through to the end of the year, which could cause further selling pressure on the leading companies.
Resistance levels broken ….
The Russell2000 index was able to break up through its 800 point resistance level on Wednesday, fueled with the buying frenzy that stemmed from the lowering of interest rates.
It failed to find continued buyer support through the remainder of the week, but also failed to find any selling pressure to fall back into the previous trading range. At this stage, analysis suggests continued buyer activity is likely to follow through. The index has broken above its 50-day moving average (considered a medium-term indicator).
The test will come on the next short-term downwards movement. If a new upwards trend is to continue, the next downwards retracement will result in a higher low point, denoting weakness in seller activity.
A revision of the weekly chart for the Russell2000 index shows a stronger break of the resistance, and potential for buyers to push this market (at least) towards 850-points. This is the previous
Crude oil prices at all time highs (again) ….
FMR Analysts had reported on Crude Oil prices a couple of weeks ago. At the time, we had mentioned that very few people were monitoring the commodity due to the concerns about interest rates.
Our concerns were that we were experiencing exactly the same environment as what we had experienced two years ago, at the same time of the year. Crude prices were pushing into all time highs, demand was high, and hurricanes in the
Well, the same thing is happening again!
Crude prices closed at $81.62 a barrel, just short of their weekly high of $82.50 a barrel through the week. Investors might not be so concerned about the price of fuel hurting their hip pocket now they have received an interest rate relief, however, it is very likely to hurt businesses that have high consumption of the commodity. Companies such as FDX are likely to experience higher operational costs, while Energy companies such as XOM or HAL could continue to find buyer demand.
Readers should keep this in the back of their minds when investing into new positions. Consider what impact there might be on that business if Energy prices continued to rise, along with what impact that might have on the broader economy.
FMR Analysts outlook ….
With the upwards break of resistance levels on the major averages, FMR Analysts is looking for confirmation that an upwards trend will persist. There is reasonable potential that we could see continued buyer activity on the back of positive sentiment, though there is still a high level of caution at this point in time.
The coming week has a large number of economic reports scheduled for release, so investors will need positive reinforcement right now. Look for potential volatility with Consumer Confidence and Existing Home Sales figures shortly after market open on Tuesday, GDP figures before market open on Thursday along with New Home Sales figures shortly after the opening bell. While on Friday we will see Personal Income and Spending figures and PCE Inflation numbers before market open.
Volatility has eased, suggesting investors are less fearful of a falling market. This means it is a high probability that buyer accumulation may take place. We need to look at the impact high Crude oil prices will have on consumers over the coming week as well, but for now it seems it is having little influence.
FMR Strategy Analysis ….
Investors could cautiously begin accumulating stock. If we are to see a continued buyer drive resulting in a new upwards trend, then now is an ideal time for buying stock. However, investors need to be cautious. Ensure contingency plans are in place, or at least exit strategies considered if the markets do give up their buying sentiment over coming weeks.
Bulls: Buyer sentiment is controlling the markets at the moment, suggesting now is the time for Bulls to enter into positions. Look for fundamentally strong companies that are showing signs of upward trends re-forming, but be cautious of the industry. Technology stocks have remained fairly robust over the last couple of months, though are trading at long-term highs. Financials might have retraced of late, but are likely to offer volatility in coming months with further subprime fallout.
Bears: If positions have not been closed at this stage, then you should be considering an exit of bearish positions. While the markets are generally trending upwards, it is a higher risk scenario for entering Bearish positions. If adamant to gain exposure to bearish positions, however, companies such as FDX (which is influenced negatively by higher fuel prices) or any of the Construction stocks with housing exposure might be considered.
Investors: Stock accumulation could be considered, though with an air of caution. If we find a weak market retracement in the coming week that results in a higher low point on the major averages, then a stronger signal for entry into new medium to long-term positions could be considered.
Traders: Bullish positions could be considered. It might be a little premature for some industries as we do not have a confirmed Bullish trend just yet, however an upwards break of resistance could be the first leg of an upwards trend.
Option Writers: September options expired over the weekend, so options writers will be looking for new positions with October contracts. For existing stock holdings, investors might like to hold and write calls later in the week. A continued rally in the markets would result in higher call premiums. For new positions, FMR Analysts suggests ITM Covered Call (Buy/Write) positions due to a continued level of caution. Evaluate for reasonable returns compared to risk on the position Naked Put positions could also be considered, but on fundamentally strong companies. Ensure strike prices are below support levels