US Market Report – week ending 26th October 2007
Turbulent market conditions have traders on a roller coaster ride of emotions, wondering what investors reactions will be over the coming week. Earnings season has given both Bulls and Bears much to think about, causing havoc for the Technical Analyst and creating an air of uncertainty.
Following the heavy selling pressure experienced on Friday the 19th October, the 20th anniversary of Black Friday (the 1987 market crash), ‘bottom fishing’ investors were buying stocks to post a mild relief for the broad market.
Tuesdays activity followed through with further buyer influence on the back of positive earnings reports from numerous companies. However, the middle of the week was lacking strong market influence.
Despite a strong earnings report from AMZN, the stock fell $12 on Wednesday while the financial sector continues to reverberate negativity from the subprime fallout with MER posting a net loss of $2.85 per share with a colossal $7.9 billion write down for collateralized debt obligations.
Thursday also gave little directional influence ahead of further buyer activity into the end of the week on Friday.
All in all, it was an unpredictable week of wild intra-day activity that saw the markets switching back and forth between buying and selling.
Crude Oil has pushed into a new all time high ….
One of the major influences for causes of concern is that Crude Oil prices have closed at $92 a barrel on Friday.
The precious commodity had found some relief early in the week, declining on Monday, but lifted $5 a barrel to close at a new all time high of $92 a barrel. Coupled with the negativity in the Financial sector with the fallout of earnings from leading Financial institutions, this could have a major influence on the
As summer ends in the
Despite the half percentage point decline in Interest Rates recently, the consumer will still feel the affect of higher gasoline and heating oil prices. This could have a major influence on Inflationary pressures as the prices of goods and services are likely to increase across the board. Nearly all goods and services are affected by oil prices, from the manufacturing, delivery to the consumption stages.
Technology stocks continue to hold the Bears at bay ….
There was only 1 reason why the markets finished the week in the positive, and that reason is Technology.
Earnings reports from AAPL and MSFT helped maintain a Bullish sense to the economy. Investors have been flocking to these stocks, and the likes of GOOG, AMZN and BIDU as the Financial sector and Blue Chip stocks have suffered from greater uncertainty over recent months.
The NASDAQ index, however, has been marking time over the last few weeks. Despite the strong rallies on these leading Tech stocks, the NASDAQ index has met with resistance and has held around 2,800 points. Clearly there is concern that a fall in the markets will see this sector retracing as well, especially as the NASDAQ market was able to limit its sell-off recently, when the broader market hemorrhaged capital value in July/August.
Throw the Technicals out the window ….
It was a tough week to be a Technical Analyst. For the investor/trader who relies on their charts to outline a directional outlook (including FMR Analysts), intra-day volatility, and mixed market sentiment from day to day, caused an extreme roller coast ride.
Despite this, the major averages were able to end the week on a Bullish note, with all major averages closing in the positive. In fact, the candlestick analyst (candlesticks are a method to represent price activity), Piercing Line patterns suggest a short-term Bullish reversal. But FMR Analysts are a little sceptical.
Using the Russell2000 index as our benchmark, there was a retracement from resistance of 850 points earlier in October. This maintained the resistance level that had formed in July/August, and our expectations are that this has a high probability of continuing to hold.
We would not be surprised to see continued short-term bullish influence, but we do not expect that this will have the buyer strength to push the markets further upwards over the next few months.
Confirmation of this outlook will depend on the activity of the markets over the coming week. If buyer demand proves quite strong, we may need to evaluate our expectations. The strength of buyers as the Russell2000 approaches 850 will be the defining key to the markets medium-term trend definition.
For many chartists, however, mixed signals throughout the week meant changing market opinions and most likely many false alerts. This has lowered the effectiveness of using technical analysis to choose market direction greatly.
All focus is on Earnings ….
Because the markets have been reacting on a day-to-day basis over company earnings results, we have added 2 tables for this weeks report. Firstly, we have a table of influential companies to consider earnings releases in the coming week, and have followed this up with brief evaluations of the earnings results from last week.
Of particular interest in the coming week is PG, RIG, and XOM. However, there are also a number of Financial companies such as UBS, PRU, ABN, and CS which could accentuate the subprime fallout.
| Monday 29th October | |
| K | Before Market Open |
| VZ | Before Market Open |
| | |
| Tuesday 30th October | |
| CL | Before Market Open |
| PG | Time not supplied |
| UBS | Before Market Open |
| | |
| Wednesday 31st October | |
| AAP | After Market Close |
| DB | Time not supplied |
| PRU | After Market Close |
| RIG | Before Market Open |
| | |
| Thursday 1st November | |
| ABN | Time not supplied |
| CS | 02:00am ET |
| EK | Time not supplied |
| XOM | Time not supplied |
| IGT | Time not supplied |
| MRO | Time not supplied |
| S | Before Market Open |
| UN | 03:00am ET |
| VRSN | After Market Close |
| | |
| Friday 2nd November | |
| CDE | Before Market Open |
| | |
We have already mentioned positive earnings from AAPL and MSFT through the week, but there was a far greater influence from a large number of companies that had released their reports this week.
| Code | Earnings Result | At/Above/Below Consensus |
| MRK | 62% increase, or 70 cents per share | Beat expectations |
| KMB | 24% rise, or $1.07 per share | Slightly beat expectations |
| SGP | 28 cents per share | Missed expectations |
| AXP | +15%, or 90 cents per share | Slightly beat expectations |
| T | 41.5% increase, or 71 cents per share | In line with expectations |
| DD | 59 cents per share | Beat expectations |
| UPS | $1.05 per share | Beat expectations |
| AAPL | $1.04 per share | Beat expectations |
| TXN | 52 cents per share | Slightly above expectations |
| COH | 41 cents per share | Slightly above expectations |
| AMZN | 19 cents per share | Beat Expectations |
| MER | -$2.82 per share | Below Expectations |
| MOT | 3 cents per share | Slightly Beat Expectations |
| DOW | 53 cents per share | Below Expectations |
| MBI | -29 cents per share | Below Expectations |
| MSFT | 45 cents per share | Beat Expectations |
| CFC | -$2.85 per share | Inline with Expectations |
| BA | $1.44 per share | Beat Expectations |
Economic focus this week ….
Despite the large number of companies scheduled for earnings announcements this week, investors are likely to re-focus back on Economic data for hopes of stability in Inflation and potentially a further lowering of Interest Rates.
There were few economic reports over the last week to concern investors who were focussed on a plethora of earnings reports. However, in the coming week, there are a number of key economic reports that will warrant consideration.
On Tuesday, shortly after market open, Consumer Confidence figures will be released for October. Personal Income and Spending data will be released before market open on Thursday, with Pending Home Sales shortly after market open and Auto and Truck Sales figures after market close.
However, investors will be particularly interested in:
- GDP Advanced: before market open Wednesday
- FOMC Policy Statement: 2pm Wednesday
- PCE Inflation: before market open Thursday, and
- Unemployment data: before market open Friday
FMR Analysts Outlook …
In considering the negative impact the subprime fallout and extremely high Crude Oil prices are having, and are likely to continue having, we believe there is a strong potential that the markets may stall in the coming 2 weeks.
However, short-term analysis of the markets shows that there is still buyer influence in the markets. This is mostly based on the Technology sectors continuing to outperform earnings expectations.
Will the FOMC lower Interest Rates or keep them steady? This is an extremely hard question to answer, and one that we believe all market participants should categorize as “Uncertain”!
For this very reason, FMR Analysts is approaching our outlook as “Neutral/Uncertain”, though with a high expectation for Bearish activity.
FMR Strategy Analysis ….
Bulls continue to beware. A mild market rally in the last week is supported only by the Technology sector. This is a turbulent period to be considering new positions, and should only be approached by confident traders/investors.
Expect market volatility due to earnings reports and economic data.
Bulls: A short-term rally could find further momentum, but monitor for early signs of seller activity to exit positions quickly.
Bears: Prepare for the potential for a downwards market. A bearish reversal pattern in the coming week would form a lower
Investors: For long-term investment positions you are not willing to exit right now, investors should enter into protection positions. The mild market rally will have eased prices of Put options, creating a better environment to create the protected position. Purchase put options (slightly Out of The Money) for individual positions, however, if you have a portfolio that reflects a particular index, such as the S&P500, purchase an index Put option to protect your portfolio. We suggest slightly Out of The Money because this will be slightly cheaper (and therefore less cost of risk), and if the markets do continue to retrace, will produce a reasonable return to offset loss on stock positions. Time frame for protection should be at least December or January expiration. FMR Analysts do not suggest entering into new long-term stock positions at this point.
Traders: Consider Bearish reversal alerts for either CFD or Option traders. Attempt to enter positions if the markets show bearish activity.
Option Writers: Volatility has slipped, but it is more due to the uncertainty of short-term market direction that we do not suggest entering into Naked Option writing positions at this point in time. If you are writing Call options against stock positions, you may benefit from the recent short-term rally.
