Weekly US Market Report – week ending 19th October 2007
Market indexes toppled as the impact of the credit crunch hit home. At the end of a week that had been dominated by mixed earnings reports, investor finally gave in to historical fear on the 20th anniversary of the “Black Friday” market crash of 1997.
The major averages had slowly trickled downwards through the week. All sectors but Technology had experienced some profit taking, causing resistance levels to form. Activity on Friday, however, negated all previous expectations with a solid day of heavy selling pressure.
All sectors, all indexes, and nearly all stocks retraced! Volatility shot up through the roof while investors have been left pondering (over the weekend), whether this particular retracement is anything like the one experience at the same time of year 1997.
For the Russell2000 index, which represents a broad number of companies in the
In July/August earlier this year, the Russell2000 index had retraced to 750 points before stabilizing and recovering through late September, early October. Because the cause of Friday’s market selling and the retracement of July/August were based on the same Subprime Credit issues, there is a high probability we may see the Russell2000 index falling towards 750 points.
Not only the Russell2000 index is showing us Bearish influence at resistance. The S&P500 index, which is heavily weighted in Finance stocks but is also considered a benchmark for market performance, has retraced more than 4.7% in the last two weeks and has another 6% potential downside to the August lows. The DOW Jones Industrial Average, which represents 30 Blue Chip stocks, has fallen 5% from its recent peak and has another 4.8% potential downside to recent lows.
On Friday, the DOW Jones index fell a whopping 366 points, or 2.6%. Both the NASDAQ and S&P500 indexes also fell similar percentages, while the Russell2000 index fell more than 3%. This is extremely significant as volume levels were very high, reflecting a monumental amount of investor fear.
Technology stocks have been the only stalwart stocks through 2007. The NASDAQ index had recovered very strongly since the August low, gaining 16% from the medium-term low. It has retraced 4% in the last 2 weeks, but with stocks such as AAPL and GOOG having shown great buyer strength, we may not find the same sell-off as in other sectors of the market.
The Credit Crunch hits home ….
As FMR Analysts have been discussing for months, the impact of the Subprime fallout had yet to be seen. But it seems now that the impact it has had on corporate earnings is now coming to light.
Over the last week, earnings reports from C, WFC, KEY, BAC, WM and WB all suggested that the Subprime lending industry has affected their earnings results. Only a report from JPM offered any relief mid-week. Yet this was clearly not enough to negate all other news.
And we should not be looking for any relief in the coming weeks. Further Financial industry earnings reports are likely to reflect the same story: that the subprime credit crunch has hurt corporate profits, and that the outlook for the housing/lending industries is not showing signs of relief on the short-term.
Maybe the market rally on the back of the half percent drop in Interest Rates was a little too ambitious, giving investors a false sense of confidence in the economy, and taking their focus away from what really does matter right now – whether or not the depth of the mortgage lending industry will grind the
Earnings season underway ….
Earnings season is well and truly underway. The large number of DOW index component stocks this last week gave us some mixed signals. Though the final score has Bears on top at this stage.
It will be another massive week of earnings. Investors should look out for the following stocks and the impact their results will have on the broader market:
| Monday 22nd October | |
| AXP | After Market Close |
| APOL | After Market Close |
| AAPL | After Market Close |
| HAL | Before Market Open |
| HAS | Before Market Open |
| MRK | Before Market Open |
| TXN | After Market Close |
| Tuesday 23rd October | |
| AMZN | After Market Close |
| AMTD | Before Market Open |
| T | Time not supplied |
| BP | 02:00am ET |
| BRCM | After Market Close |
| CTX | After Market Close |
| COH | Time not supplied |
| DD | Before Market Open |
| LXK | Before Market Open |
| LMT | Time not supplied |
| XTO | Time not supplied |
| Wednesday 24th October | |
| AMGN | After Market Close |
| BUD | Time not supplied |
| COP | Before Market Open |
| GD | Time not supplied |
| GENZ | Time not supplied |
| MER | Time not supplied |
| MCO | Before Market Open |
| NOC | Before Market Open |
| OXY | Before Market Open |
| PHM | After Market Close |
| SYMC | After Market Close |
| BA | Before Market Open |
| NDAQ | Time not supplied |
| VAR | Time not supplied |
| Thursday 25th October | |
| APA | Before Market Open |
| BIDU | After Market Close |
| BMY | Time not supplied |
| CAJ | 02:00am ET |
| CELG | Before Market Open |
| | Time not supplied |
| GFI | Before Market Open |
| HMC | Time not supplied |
| LLL | Before Market Open |
| MBI | Before Market Open |
| MSFT | After Market Close |
| MOT | Before Market Open |
| SNE | Before Market Open |
| SO | Before Market Open |
| ERIC | 01:30am ET |
| DOW | Before Market Open |
| Friday 26th October | |
| CFC | Before Market Open |
| NSANY | 03:30am ET |
| WMI | Before Market Open |
Earnings over the coming week will be heavily dominated by Energy companies. We also have a number of Asian auto manufacturers reporting, as well as other energy related industries such as air transportation.
However, we are not likely to see an impact on earnings from the recent strong rise in Crude oil. Therefore, we could find mixed reactions from the markets on these earnings announcements.
Economy slowing, but is this enough ….
Economic data, and the Beige Book report from the Federal Reserve, have shown that the economy has slowed through the first half of 2007.
CPI (Consumer Price Index) data was released on Wednesday 17th, showing an increase of 0.2% for September. This has become the average expectation over recent months and is inline with where the Federal Reserve needs to contain Inflation.
However, on the same day, poor housing data negated any positive investor sentiment that might have transpired. Housing Starts fell by 10.3% in September to their lowest level in 14 years. The prospects for this industry are not looking good for the remainder of this year, and heading into the next.
The Federal Reserve stated in the Beige Book that “the pace of economic expansion has decelerated since August” in relation to the housing market. This could mean there is much more impact yet to be felt in this industry, and as continue to expect, the Finance industry as well.
Crude Oil reaches a new high ….
FMR Analysts has been reporting that Crude Oil has been pushing for new highs over the last 2 months. Investors were more concerned with other factors such as the Subprime, but now are beginning to take notice.
The precious commodity peaked at $89.55 a barrel on Thursday as fears of a Turkish invasion into northern
It is hard to grasp how much truth there is behind these “rumours”, but one thing is for certain, the markets are taking it seriously. There might be some relief in the commodity over the coming week, but we should not be expecting the prices at the pump to decrease anytime soon.
Consumers will be the worst hit by these higher prices, and this is ahead of the peak consumer spending period of Christmas. If prices remain around these levels, even if they drop slightly, there will be less money in the pocket of consumers over the coming months. This is even despite the half percent drop in interest rates recently.
FMR Analysts Outlook ….
Market sentiment has turned bearish as of Friday with the massive fall on the DOW, and other major averages. This would suggest there is a very strong potential that the markets might continue to fall over the coming 2 weeks, potentially falling another 6%.
But it is earnings season, and we have seen quite a few key companies exceeding earnings expectations. For this reason, we are expecting continued volatility.
Ideally, we would like to see what strength the buyers have. If there are some positive earnings reports on Monday, possibly Tuesday, and the markets fail to lift significantly, then expect continued selling pressure.
Do not be surprised to see continued selling pressure on Monday, though. Asian-Pacific exchanges have followed the
FMR Strategy Analysis ….
Bulls beware. Short-term analysis suggests we may have an end to your recent run. However it is too early to establish downward trends just yet.
This is a turbulent period to be considering new positions, and should only be approached by confident traders/investors.
Bulls: Your outlook should change to neutral right now as the market retraces. If you have not exited positions just yet, you should be evaluating to do so.
Bears: Prepare for the potential for a downwards market. It may be difficult to get onboard this retracement, depending on whether stocks continue to fall quickly on Monday. It is dangerous to enter straight after a strong push like Friday’s, so FMR Analysts suggests monitoring for a weak buyer relief rally. If it doesn’t occur, then we might have missed the trigger to enter on this retracement with Friday’s movement proving too strong.
Investors: For long-term investment positions you are not willing to exit right now, investors should enter into protection positions. 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. Friday was a strong trigger for Finance and Housing related stocks. Attempt to enter positions if the markets continue to show bearish activity, and not if the markets are rallying.
Option Writers: October option contracts expired over the weekend, however, the strong fall on Friday suggests option writers should be extremely cautious in writing new November positions at this stage. Monitor markets for stabilization before considering Naked positions