US Market Report – week ending 16th November 2007
Investors have been 100% focussed on Financial stocks over recent weeks. Following the market retracement in July/August on the realization that Subprime lending had ground borrowing between banks to a halt, many investors had felt the worst had been released. However, there has been a clear secondary reaction from investors since October.
The markets are not longer supporting a Bullish trend. Resistance in the major averages and strong selling volume confirm the end to a 4 year upwards trend. The focus now should be whether or not the new trend will become a sideways consolidation or completely reverse into a downwards trend.
With the markets having retraced over the last 6-weeks, they are now testing their medium-term lows. If a sideways consolidation market were to form, we would see the markets holding their medium-term lows, potentially rallying on the short-term, sometime over the next 2 weeks.
But a continuation of selling activity will form a “lower low” level, and this denotes the potential of a change in trend.
Using the Russell2000 index as a benchmark for overall performance, we will evaluate this further …
On a daily chart, the Russell2000 shows us a short-term downwards trend over the last few weeks. It has retraced from resistance of 850 points, and is now trading above support of 750 points. It has retraced more than 10% in just under a month.
The weekly chart shows us a larger consolidation pattern since May/June. Following the retracement in July, the market held the support at 750 points, rallied to the previous
Both the S&P500 and DOW Jones Industrial Average both show similar market patterns. The NASDAQ index, however, still maintains a long-term Bullish trend. It has retraced over the last 2 weeks, however, is not finding resistance on the upward legs, nor is it retracing back to previous low points.
Economic data confirms the economy is not growing at previous rates ….
Ideally, this is exactly what the Federal Reserve wants. For the economy to slow its rate of growth, and ease the pressure of inflation. Especially during a period where there are concerns that the economy could slip into a Recession through 2008.
Over the last week, we had the release of key economic data through the PPI (Primary Price Index) and CPI (Consumer Price Index). Both of these figures give the Fed Reserve a reasonable measurement on inflation and the affect their recent interest rate cuts are having on consumer spending.
PPI data was unchanged from October coming in at 0.1%. The markets had been expecting a slight increase to 0.2%. While CPI came in at expectations with a slight rise. Core CPI (which excludes food and energy) rose 0.2% and total CPI rose 0.3%. Annual CPI for the year remains relatively low (compared to previous years during a growth economy), at 2.2%.
Next week we will have 2 sectors to focus on:
1) Housing, and
2) FOMC minutes
On Tuesday the 20th, the release of Building Permits and Housing Starts figures before market open will pave the way for buyers or sellers to enter the markets. These figures are all tied in with the recent Subprime Credit Crunch and will either spook investors or support buyer accumulation.
Later in the day on the 20th, the Federal Open Market Committee (FOMC) will release the minutes from their October 31 meeting on Interest Rates. The content of these minutes will also help support buyers or sellers due to the impact this is expected to have over the coming months.
Financial stocks in the news …
As we had mentioned in the introduction, Financial stocks have been the key focus of investors over the last week. The fallout from the Subprime Credit Crunch is the main cause of the nervousness accompanying this focus.
To start the week, brokerage firm E-trade (ETFC) plunged 59% as the company announced the 4th quarter would experience further write-downs and that their previous 2007 earnings outlook should not longer be considered.
From the June high to this weeks low, ETFC had lost more than 87% in value. It recovered through the week to close at meagre $5.44 per share.
Research firm Citigroup (C ) downgraded ETFC from Hold to Sell stating the company could potentially fall into a Bankruptcy filing.
While ETFC was sky-diving without a parachute, the larger Financial stocks were actually finding some buyer accumulation. MER, GS, WM, C, and LEH (just to name a few), helped lift the Financial sector early in the week. However, almost the entire sector gave back those early gains before the closing bell on Friday.
News from across the
At the same time, the WFC CEO stated “We have not seen a nationwide decline in housing like this since the Great Depression. I don’t think we’re in the ninth innings of unwinding this.”
And to end the week, economists from Research Firm Goldman Sachs (GS) suggested that losses following the Subprime fallout could reach $2 trillion. This further drove the sector downwards and left investors feeling deflated for the week.
The Financial Sector Spdr ETF (Exchange Traded Fund) index has held relatively steady around 30 points. Last week, we had identified this level as a crucial indication as to the potential for a continued downwards trend. Ideally, a short-term rally culminating in a Bearish reversal would give sellers added incentive to drive this sector down further.
Not all looks rosy for the
Along with the falling markets, the US dollar has been steadily retracing since late 2005. It has retraced more than 20% in that time and is not showing any signs of slowing.
Over the weekend, an announcement from the Iranian President Mahmoud Ahmadinejad suggested that OPEC members (Organization of Petroleum Exporting Countries), have expressed an interest in converting their cash reserves into a currency other than the “depreciating US dollar”.
This statement may be more political than progressive, as many readers will be aware of the ongoing tensions between
The US dollar is used as a major benchmark for many commodities around the world. If it were to start losing its grip as the benchmark currency, it is highly likely this would have a major negative impact on the economy and subsequently the markets.
FMR Analysts Outlook …
Our outlook over the last few weeks has been Bearish. Short-term analysis suggests there is no slowing of seller momentum at the moment, and with economic data on Housing scheduled for the coming week, the Bears might just get fuel to continue driving the markets down.
However, with economic data showing that growth is not as strong as it had been earlier in the year, we might find that investors could perceive these markets to be at a good accumulation point.
The bottom line is whether or not a sideways consolidation will form (holding the support), or whether investors will turn the short-term downwards trend into a medium-term trend. Neither could be confidently predicted at this stage.
For this reason, the coming week is pivotal in defining the medium-term trend heading into Christmas and the New Year.
Our expectations are that we might find another mild market rally early in the week. Depending on the reactions of Tuesdays economic data and FOMC minutes will determine whether or not a rally will ensue through to the end of the week.
If buyers are present this week, we could expect a mild rally but not one that would result in a Bullish market holding for an extended period of time. If sellers dominate, we would expect continue panic activity to fuel a deeper medium-term downwards trend.
FMR Strategy Analysis …
This week is pivotal for medium-term market activity heading into the end of the year.
Bulls: It would appear the Bull market of the last 4 years is at an end.
Bears: A short-term downwards trend could build into a medium-term downwards trend, however, the major averages are now trading on support levels. Monitor for a week market rally to reverse, and form the next downwards leg.
Investors: We have been recommending Protection strategies on stock positions for the last month. If investors are not already in protection strategies, they are likely to have suffered depreciation in the value of their portfolios. It will be expensive to enter into protection strategies at the moment, but on any short-term market rallies, look to hedge positions/portfolio.
Traders: With the potential of the markets holding support, a short-term directional movement could swing in either direction. There is more probability that sellers will continue to influence the market, so short-term traders should maintain this focus until we have a change in trend.
Option Writers: November options Expired over the weekend. For Naked Put traders, you should consider less exposure in the markets, possibly even remaining sidelined. If you are confident there is a strong potential the markets may hold their current levels, look for entry into deep OTM (Out of The Money) positions. Lower return = lower risk! Covered Call writers should also be cautious, looking to enter into ITM (In The Money) positions. If the markets were to break downwards, this would have a negative impact on any Covered Call position. If considering Covered Call positions, only hold a medium-term outlook, looking to invest for the next month or two.