US Market Report – week ending 28th September 2007
Buyer momentum slowed in the last week over concerns that the
Euphoria from the half point lowering of Interest Rates a week ago has tapered off as economic data shows Consumer Confidence slowing, Housing sales dropping, and investor sentiment weakening.
When Interest Rates were lowered a half point on Tuesday the 18th September, investors lifted the markets spectacularly. It was more then they had been hoping for, subsequently sending the markets up on a strong wave of buyer sentiment.
But since then, the major averages have been hovering sideways with little direction. For the last week and a half, the DOW Jones Industrial Average, NASDAQ, and S&P500 indexes have been trading sideways in a short-term consolidation.
These indexes had rallied towards their recent long-term highs of mid-July, which had formed just before the recent Subprime lending fallout. Buyers have not been able to find the strength to push into new long-terms on this latest recovery, which offers some suggestion that a continued upwards trend might not persist.
Despite our concerns that the economic slowdown could cause an end to this short-lived rally, weekly charts of the major averages still produced positive (though weak) candlesticks for the DOW, NASDAQ and S&P500 indexes.
However, the Russell2000 index, which is a reflection of the broader market including mid-capped stocks, actually lost ground in the last week. What this might reflect is a “flight to quality” as investors put their money into bigger “Blue Chip” stocks, which are trading at discounted prices after the recent market correction.
UAW calls a strike on GM ….
The United Auto Workers union called a strike against GM last Monday with nearly 73,000 workers walking off the job. The two parties are struggling to come to an agreement over health care costs.
In the last few years, the US Auto Industry has struggled to compete against cheaper (and more economical) manufacturing bodies from Asia, including
The huge costs associated with ongoing health schemes, which apply even after a 20 year employee has retired, have been crippling for GM (as well as F and DCX), who have been losing sales to cheaper imports.
More then 18 months ago, it appeared that GM and the UAW had come to terms that if cuts to the Health Care schemes were not made, that GM might fall into bankruptcy. And then everyone would lose. But it appears the boat has yet again been rocked.
Luckily for GM, the stock price has not suffered too much with it maintaining prices near 12-month highs.
Busy week for economists ….
Key economic data released through the week kept investors wondering about future market direction.
Consumer Confidence, released on Tuesday the 25th, reported a slowing in September. Economists had been expecting a 105 point figure, but it came in at 99.8. This is the lowest figure in nearly 2 years, sparking concerns that Consumers will tighten their spending.
Weak earnings warnings from Retail companies did little to counter-balance the weak economic data as well. As the end of the month, and quarter neared, these warnings might be signs that we could again experience a poor October performance (October is considered the worst performing month of the year according to historical records)
On the same day, Existing Home Sales figures were released, again falling short of economists expectations. Home Construction companies have been in a bearish environment for the last 2 years, and there does not appear to be an end to this weakening market.
Later in the week, the release of New Home Sales, Personal Spending and Income and the PCE Inflation indicator did little to inspire buyers to follow up from the Interest Rate lowering the week before.
Next week, Auto and Truck Sales figures will be released after market close Monday. Further Retail Sales will be released for September figures, while one of the key economic reports, is scheduled for release before market close on Friday.
Unemployment data is one of the top 5 economic reports that defines the health of the economy. For the last few years, Unemployment has been running at long-term lows, supporting a healthy economy. However, if we begin to see a rise in Unemployment, this could have a drastic affect on Investor confidence.
Volatility still falling ….
The CBOE Volatility index (VIX) continued to fall this week, though found some upwards pressure on Friday.
This suggests that investors no longer fear a falling market, as much as they had a month ago in any case. Currently, the VIX is trading at 18 points. To erase all fears from investors, we would need to see this indicator trading closer to 15 points.
Right now, 18 points suggests some concerns remain. However, the steady decrease over the last two weeks adds some bullishness to our evaluation. For now, we need to continue monitoring this indicator. Especially as the major averages find weakness at long-term high levels.
FMR Analysts Outlook ….
The true test to whether a bullish market has been re-established is if we find the major averages forming a higher low point.
We believe that a greater underlying negativity exists due to the slowing economy. For the last 6-months we have been on alert for economic data to confirm a change in economic strength. It began with the end of the Housing Boom a couple of years ago, but has continued through other economic sectors such as the Financial industry and Construction.
However, strong Merger and Acquisition activity over the last 12 months shows that businesses have money to spend and are looking for methods to increase their cashflow through future downturns in the markets.
If the markets retrace in the coming week on weak selling pressure, form a low point that is higher then the one that formed in early September and is followed up with buyers pushing for new highs again, then a Bullish trend will truly be established.
A stall in the markets now will be a very Bearish sign. It will show a lack of demand from buyers at these high levels, potentially forming Double Tops and confirming Resistance levels.
FMR Analysts is expecting a market pullback in the next week, however, a short-term consolidation such as we are experiencing at the moment, could shift in either direction depending on results of economic and company news releases through the week.
FMR Strategy Analysis ….
Investors could cautiously continue to accumulate stock. 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: Following the rally from the Interest Rate lowering 2 weeks ago, buyer activity has failed to continue lifting the markets. This suggests caution for Bullish investors.
Bears: A short-term sideways consolidation in the last week and a half, coupled with weak economic data has the Bears salivating at a potential market retracement. Not all is well with US economics at the moment, with fears this could be the pre-cursor to a future bear market.
Investors: Stock accumulation could be considered, though with an air of caution. If we find a weak market retracement in the coming week/s 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: 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.