US Market Report – week ending 5th October 2007
Economic data continues to show a weak economy, however, investor sentiment is yet to reflect the impact this might have on the overall market trend.
Investors started and ended the last week with a strong buyer push. The first day of trading for the 4th quarter 2007 was dominated with buyers as sentiment suggested a continuation of the market recovery is well and truly established. This occurred despite negative warnings from UBS and C that they are likely to experience weaker earnings for the third quarter due to the subprime lending influence.
Then, at the end of the week, investors had been eagerly anticipating the September Unemployment report. With strong job growth through the period, and with August numbers being revised upwards, investors found further reason to continue buying stocks.
Even the heavily burdened Financial sector continued to rally even though there is a strong likelihood that we have not yet seen the end of the subprime fallout. This sector has recovered more than half the loss that had been made recently and is showing strong signs of recovering back to long-term highs.
The Housing sector is also continuing to show weaker economic data. Pending Home Sales data was released by the National Association of Realtors, showing the largest drop since January 2001. Construction stocks with exposure in the Housing market failed to find the same buyer drive as the rest of the market, though are still holding above their recent long-term lows.
For the better part, mid-week activity remained somewhat steady as investors had little to react to. Investors were all waiting for Friday’s Unemployment report in a week that was relatively quiet.
Buyer dominance ….
By all accounts, all the major averages are not sporting upward trending movements. Strong buyer activity on the Russell2000 index has lifted this broad based index to be trading just short of its long-term highs above 850 points, set only 2 months ago.
With strong buyer activity in Financials as well, the S&P500 index (used by many as the benchmark index for the
Investors were also given further joy as the DOW Jones Industrial Average broke back above 14,000 points. Although only representing 30 Blue Chip stocks, the DOW is considered a sentimental indicator to market performance.
Finally, Technology investors were well rewarded as the NASDAQ index also broke upwards into new long-term highs. Leading companies such as AAPL and GOOG have continued to break new territory and have pushed this index solidly.
Technology stocks were not as affected by the recent Subprime credit crunch that caused the market correction. This has given the NASDAQ index a better grounding for its current upwards rally. It closed at 2,780 points on Friday, but is still a far cry from its all time high of 5,132 on the 10th March 2000.
Volatility continues to ease ….
As expected, with the markets continuing to rise on positive investor sentiment, Volatility has eased.
The CBOE VIX index, known as the investor fear gauge, rises during periods of great uncertainty and concern. It peaked at a phenomenal level of 37.50 points on the 16th August, but has since been slowly retracing back to what is considered “normal” levels.
FMR Analysts is expecting a sideways consolidation pattern to form if a stronger upwards trend forms on the major averages. The real test will come on the next downwards retracement of the markets. A shallow retracement forming a higher low point on the major averages is likely to find the VIX consolidating sideways. Our expectations are for this to occur above 12 points.
The Week ahead ….
Next week has a number of key economic reports scheduled for release. The FOMC (Federal Open Market Committee) minutes from when they lowered interest rates by a half percent, will be released at 2pm EST Tuesday. Investors are likely to scrutinize this statement for any insight into future interest rate adjustments.
Retail Sales figures are scheduled for release before market open on Friday. Considering the recent state of economic uncertainty, and because the
Also to be released before market open Friday is the September PPI (Primary Price Index). This index measures the prices of goods and services at a wholesale level, and is somewhat of a leading indicator to CPI (Consumer Price Index), which is a key economic indicator to measuring the state of the economy.
Investors will generally be nervous about the upcoming weeks economic data, but will also begin worrying about the 3rd quarter earnings season which unofficially kickstarts on Tuesday the 9th October with AA releasing their information.
The first week of earnings season is usually relatively quiet. However, the following week will find a plethora of reports hitting the newswires. The recent economic turmoil could have a major impact on certain sectors such as Finance, however, the half percent decrease on Interest Rates will not yet begin to influence corporate earnings.
FMR Analysts Outlook ….
With an upwards trend established, buyer sentiment entrenched and the major averages beginning to trade back into new long-term highs, there is little reason to see why the markets might find selling pressure in the coming week.
Fear might find investors taking profits and closing out of positions, purely because the markets have recovered. However, we are not likely to find sufficient selling pressure to cause a market downturn again, based purely on this fact alone.
Again, Friday will be the key day to be watching. With Retail Sales and PPI figures scheduled for release, investors will become nervous heading into Thursday.
Also watch out for Investment firms adjusting their outlook for corporate earnings. We may find a number of downgrades on leading companies as the fallout from the subprime lending credit crunch begins to take shape in company profits.
FMR Strategy Analysis ….
Stocks are trading at high prices, however, there are no signs of sufficient weakness to suggest a downturn in the markets over the coming week.
Bulls: The recent recovery following the market correction of the last two months, would suggest a continuation of the previous Bull market has been established. Bulls need to be cautious of the potential of the market long-term highs holding as resistance. However, only change your Bullish view once the pattern has been established, not before.
Bears: An upwards trend has been established on both the short-term and medium-term time-frames. If we find another higher low point on the next market retracement, then Bears should be completely out of the market.
Investors: Stock prices are beginning to trade back at high prices, which is not the ideal point to be accumulating stock. Some share prices may still be undervalued and will benefit from continued upward activity on the short-term, however, for now FMR Analysts would suggest holding stock portfolios. Buy on the next market dip, once a Bullish reversal has confirmed.
Traders: Bullish positions could be considered. For those option traders concerned that profit taking might occur on the short-term, you could consider risk management strategies such as Bull Spreads. CFD traders should stick to Bullish entry signals.
Option Writers: October contracts only have 2 weeks left until expiration. This is not an ideal period for writing Call options against share positions as premium returns will be very low. Naked Put writers could consider some short-term October positions, however, might also like to consider November contracts which are now within the 6-week window of opportunity