US Market Report – week ending 7th Sept 2007
With a shortened week due to the Monday Labor Day holiday, investors had less time to reflect on economic data. Uncertainty for medium-term direction continues to be the overriding factor with sentiment, resulting in the Bears controlling activity into the end of the week.
Investors had started on a positive note when trading resumed on Tuesday. Financial stocks posted a recovery in light of the Subprime Lending negativity that has controlled sentiment of late. However, it was Technology stocks that were dominant as the NASDAQ index appeared to be attempting a return to a Bull trend.
As the week progressed, however, focus turned to the upcoming FOMC (Federal Open Market Committee) meeting on Monetary Policy (Interest Rates). Economic data over recent weeks has clearly shown that the economy has slowed, and this has increased the expectation that the Federal Reserve should lower Interest Rates to ease the pressure on Consumers.
With this in mind, the release of the monthly Unemployment data on Friday stirred the hornets nest, and Sellers returned to the markets en masse. The data showed that the annual Unemployment rate stayed steady at 4.6%, however, the report showed that non-farm payroll data was much weaker than expected.
For the first time since August 203, the data was negative at -4k compared to the expected 110k. At the same time, July and June figures were revised down, and this sent a wave of uncertainty across the markets.
This now suggests that August was a much weaker economic period than investors had thought, and with the fallout of the subprime lending industry yet to really impact economic data, investors are apprehensive.
Market activity was controlled by the Bears into the end of the week, causing interesting Bearish reversal patterns on the major averages.
Trends to be defined ….
All the major averages closed down for the week, though medium-term trends are still not yet defined.
Last week FMR Analysts had reported the Russell2000 index as potentially holding the 800 point resistance level, and we were not disappointed. Although the buyer activity early in the week attempted to break the resistance, Friday’s activity has formed a clear reversal that suggests the broader market is in a Consolidation pattern.
The Russell2000 index is now trading just above the previous low point, though is still well above the 750 point Double Bottom that had formed earlier in August. There could be no certainty at this point in time whether the broader market will continue to find selling pressure to the support ahead of the FOMC meeting on September 18th. Therefore, caution is the key word for the time being.
For the other major averages, although they produced similar bearish reversal patterns over the week, their broader Consolidation patterns have a mild upwards tilt. This could be a “counter-trend” movement resulting in further bearish activity, but for now we need to continue monitoring for confirmation.
Another week of Bear pressure will have investors very concerned. A larger downwards trend will have formed and that could see sellers increasing their exit strategies for long-term positions.
With all major averages showing similar patterns, our expectations for further bearish activity would be confirmed if they were to break the following low points:
| INDEX | Low Point to Break | % move from current value |
| DOW Jones | 13,000 | 0.86% |
| NASDAQ | 2,500 | 2.53% |
| S&P500 | 1,430 | 1.58% |
| Russell2000 | 765 | 1.29% |
Volatility rises on uncertainty over Interest Rates ….
Following the market fall on Friday, Volatility increased and pushed to its recent short-term high. The VIX indicator, considered the “investor fear gauge”, has been trading at long-term highs since late July. The higher the VIX index trades, the more fear there is that the markets will be negative.
Right now, investors are fearful of the impact the subprime lending industry will have on the broader economy. Because investors “want” interest rates to be lowered, they are also fearful that the Federal Reserve will not lower Interest Rates to ease their discomfort of the recent economic pressures.
This has the VIX trading at high levels, closing at 26.23 points on Friday. It peaked at a high of 37.50 on the 16th August, and although has eased, is still trading at dangerous levels. Hence the cautious approach to be taken over the markets through the coming weeks.
Crude Oil now trading at long-term high levels ….
Sneaking under the radar over the last few weeks has been Crude Oil. Reports of Hurricane activity through the
However, exactly the same weather activity only a couple of years ago had sent the commodity into record highs, causing the markets to retrace through the October period.
Crude Oil closed at $76.70 a barrel on Friday, just short of its recent long-term high of $78.70 a barrel on the 1st of August. This level coincides with the Double Top peak from July/August of 2006, forming a fairly solid resistance level.
If this level were to be broken, investors will need to be very concerned. Tie this in with Interest Rates being held at the current base rate, and there would be very little incentive for investors to remain Bullish. FMR Analysts would expect this scenario to lead to a larger market correction over coming weeks.
Economic reporting to step-up ….
The coming two weeks will not get any easier due to the number of economic reports due for release. On Monday, Consumer Credit figures will hit the market at 3pm EST. Although a quiet mid-week, Friday has a plethora of economic reports, although most are not “market movers”. But look for the Retail Sales figures to before market open on Friday to have an impact.
Although recent Same Store Sales figures were positive for the likes of WMT and TGT, market fears tend to see Consumers tightening their spending. There is a mild probability that we will find some weakness in these figures.
FMR Analysts is looking ahead to the following week starting September 17th. This is a “high impact” week for economic reports with PPI figures at 8:30am Tuesday 18th and the FOMC monetary policy statement at 2:15pm later that day. Wednesday follows up with CPI data before market open, as well as Building Permits and Housing Starts.
FMR Analysts Outlook ….
It would not be a surprise to see a mild market recovery early in the week. We had stated the same thing last week, which did occur. This just seems to be the trend of late. Following strong selling pressure (based on a specific market report), mild recovery ensues while there are no reports to influence panic selling.
But there is also a very large argument for “non-activity”. Investor sentiment is frayed to say the least. While there may not be economic reports scheduled for release that will influence selling pressure, there also is very little incentive for investors to want to buy stocks – outside the fact that they are off their yearly highs.
We might find this to be a mild week of volatility ahead of the FOMC meeting on the 18th September, so we are recommending caution for all investors and traders.
Earlier in the week, FMR Analysts had taken a Bearish position on the Russell2000. It currently holds a profit, though we are cautiously monitoring the markets. Although we hold a Bearish position over the markets, we would not be considering entry into a new Bearish position as there is less certainty in direction right now.
Continued selling pressure is a higher probability, so if any strategies at all were to be considered, it would be Bearish.
Strategy Analysis ….
Bulls:
- Optimism is low at present
- Low probability of market rallying through recently formed resistance levels
- Need to see market consolidation hold, leading into buyer accumulation to begin new upwards trend.
Bears:
- Sentiment leaning towards Bear market
- Medium-term downwards trend confirmed
- High volatility causing difficulty for entry into Bearish strategies
- Higher probability that Bears will drive markets downwards.
Option Writers:
- There are only 2 weeks left on the September contracts
- Volatility is high, which suits this strategy
- While Time Decay will be at its peak this week
- Small returns are possible but due to the high probability that the markets could fall, this is a high risk period for writing Put option contracts
- Call writers (Covered only) could attempt to lock in some additional gains by writing ATM, but only if prepared to have the position Exercised should the markets hold or rally.
Directional Traders:
- Higher volatility means this is not a suitable period for Option buying
- It is a high risk period for being “whipped out” of trades
- If trading, look for low volatility stocks that have maintained trend (there is a low potential of finding these types of stocks at the moment).
- For those confident in market direction, look for a directional play with lower risk, and be prepared to exit early if volatility remains.
Investors (medium/long-term):
- Continue to monitor for clarity in market direction before buyer accumulation
- Too early to confirm that a Bull market will ensue, with high probability that Bears might persist on short to medium-term.
