Weekly US Market Report – week ending 12th October 2007
Earnings season is underway, and investors traded through the last week with some caution. Investors continue to tout for interest rates to be lowered, but the release of the FOMC minutes offers little outlook that this will occur. While Crude Oil drives into new all time highs on speculation.
The week had started somewhat tentatively as investors absorbed strong gains from the previous week. But the inactivity early on was mostly due to the scheduled release of the FOMC (Federal Open Market Committee) minutes on Tuesday at 2pm.
These minutes include the discussion of the Federal Reserve leaders and are used by analysts and investors as a guideline for future potential Interest Rate changes.
Following the half percent decrease in interest rates on September 18th, buyer demand has controlled the markets. Investors have “more money” in the bank as less interest is paid on loans, and hence lower interest rates instigate further spending. But the investor is always wanting lower interest rates, which is not always a positive for the economy.
In recent years, the
Inflation is the key. Over the last 3 years, Interest Rates have risen from a long-term low of only 1% to 5 and ¼ %. This helped keep inflation in check, although it continued to trade above the target rate of 2 to 3%.
But the recent Subprime Lending credit crunch caused widespread panic, which caused the Fed Reserve to lower interest rates by a half percent. This will instigate enough spending to alleviate negative market sentiment surrounding the subprime market, but should not be used as an indication that the Fed is likely to continue lowering rates in coming months.
Inflation has remained steady through 2007, but has not decreased significantly enough to warrant continued lowering of interest rates. Therefore, investors should remain cautious on the short-term and not become over confident.
Earnings season has started with mixed results ….
Controlling investor focus at the moment is the 3rd quarter 2007 earnings season. It began after market close Wednesday when AA (Alcoa) released their earnings report. They had missed analyst expectations, though positively announced an increase to their buyback authorisation.
Numerous other companies have gotten in early to pre-warn their upcoming announcements. CVX, TGT, IP, WMT and MCD all offered guidance for earnings. The latter 2 lowered their expectations. However, most analysts will be looking deeply into the large Investment/Banking firms such as MER, GS, LEH, C, and UBS for the impact that the subprime credit crunch has had on their profitability.
The coming week is one of the busiest for earnings announcements over the coming month. There are 13 DOW index component stocks (the DOW is a representation of 30 stocks), reporting earnings in the coming week. Of note are:
| Monday 15th Oct | |
| C | Before Market Open |
| Tuesday 16th Oct | |
| DAL | Time not supplied |
| INTC | After Market Close |
| IBM | Time not supplied |
| JNJ | Time not supplied |
| LLTC | After Market Close |
| STX | After Market Close |
| WFC | Before Market Open |
| YHOO | Time not supplied |
| Wednesday 17th Oct | |
| ABT | Before Market Open |
| MO | Time not supplied |
| AMR | 12:00pm EST |
| BLK | Before Market Open |
| EBAY | Time not supplied |
| JPM | 0:700am EST |
| KO | Before Market Open |
| UTX | Before Market Open |
| WM | After Market Close |
| Thursday 18th Oct | |
| AMD | After Market Close |
| BAC | Time not supplied |
| BK | Before Market Open |
| COF | 4:05pm EST |
| | Before Market Open |
| DJ | Before Market Open |
| LLY | Before Market Open |
| GOOG | After Market Close |
| NOK | Time not supplied |
| STJ | Before Market Open |
| Friday 19th Oct | |
| MMM | Before Market Open |
| CAT | Before Market Open |
| FITB | Before Market Open |
| HOG | Before Market Open |
| HON | Before Market Open |
| SLB | Before Market Open |
| WB | Before Market Open |
| XRX | Time not supplied |
Volatility remaining neutral ….
Following the decline in volatility after the recent market correction, the CBOE VIX indicator has remained relatively neutral of late.
The VIX is considered the “investor fear gauge” and is used as a benchmark to measure the potential for movements in the market.
It rallied on Thursday due to a fall in the markets, but only gained enough to offer mild concern. The index, as per the accompanying chart, appears to be in a mild consolidation pattern, trading in a sideways fashion. We may find that this is the level that it will taper off as the market establishes a longer-term trend. However, a break above 20 points would indicate that there is greater fear amongst investors and potential could lead to another fall in the markets.
Testing time for the major averages ….
As earnings seasons has begun, this will be a testing time for the major averages. The Russell2000 index, which is a broad reflection of mid-cap stocks, has rallied up to its long-term highs since September. Buyer strength has slowed, causing some concern that the previous resistance might again hold this market back.
Trend activity, however, continues to maintain a short and medium-term upwards trend. We would only consider a potential end to this trend if the Russell2000 fell back below 800 points, from its previous low level.
All other major averages have shown similar weakness as buyer momentum has eased in recent weeks. This could be a strong reflection of caution ahead of the earnings season.
FMR Analysts Outlook ….
Trend activity suggests we should continue to find bullish direction over the medium-term. However, short-term stabilization on the major averages at long-term highs warrants concern.
Foremost, we expect there will be some volatility injected into the markets due to Earnings announcements. This is a normal cyclical event. The results over the next 2 weeks will establish whether there has been continued business growth or if the subprime credit crunch has affected the economy on a much deeper scale. Making the short-term outlook a little harder to define.
FMR Analysts would not be surprised to see profiting taking, but is expecting investors to react on a day to day basis at this stage.
Technology stocks have remained strong through the recent market correction and are driving the markets forward at the moment. Areas of weakness include Housing Construction stocks and Mortgage Lenders. Also be aware of the airlines, which have been flying under the radar despite crude oil prices pushing into record highs.
For the time being, FMR Analysts will hold a short-term neutral outlook and a medium-term bullish outlook based on trend.
FMR Strategy Analysis ….
Stocks are trading at high prices, however, there are no signs of sufficient weakness to establish a Bearish outlook just yet. However, entry into new positions should be limited due to the short-term neutral outlook as outlined above.
Traders and Investors considering new positions, or evaluating current positions, should evaluate when earnings announcements are scheduled. Also be aware of related companies (Industry, products, etc) who are scheduled for earnings announcements as this news could also affect your position/s.
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 the medium-term time frame. If we find another higher low point after 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 are trading in their last week, with expiration occurring this coming weekend. 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.