US Market Report – week ending 23rd November 2007
A shortened trading week gave investors a break from recent Bearish momentum. The Financial sector has dominated the market slide, yet again, while investors were spooked by the Federal Reserves apparent “indecision” when Interest Rates were recently lowered.
FMR Analysts had expected a mild recovery early last week, followed by selling activity heading into the Thanksgiving holiday Thursday. The actual market activity for the week was the reverse of our expectations, however, was still dominated by sellers overall.
The Bear trend appears to be relatively entrenched, with the S&P500 and DOW Jones indexes having retraced 10% since the high in October, while the Russell2000 index has retraced more than 13% over the same time frame.
We now find the major averages trading at their medium-term low levels, with the question of “will they hold here” foremost on investor minds!
A mild recovery during a half day of trading Friday denoted a small level of “bargain hunting” that might lead to a greater sense of the markets being oversold for now. But readers must not forget that many major market players would not have been participating during Friday’s activity as they enjoyed an extended long weekend.
For now, with current short-term trends denoting selling pressure, investors should maintain bearish views in the markets until a change is otherwise confirmed.
Economic data not as week as first expected …
Investors started the week with Housing data. This turbulent sector has suffered from a housing slump that started more than 18-months prior, but has been fueled by the Subprime Credit Crunch that has rocked the broader market in recent months.
Mixed data for Housing on Tuesday saw the markets wavering. Housing starts increased 3% in October, however, Building Permits declined 6.6%, negating any positive activity that could have led to a market rally.
Prior to this, the National Association of Home Builders had released their confidence index on Monday. It reported the lowest level since 1985, when this report was first recorded.
The negative confidence data and the heavy decline in Building Permits certainly far outweighs the Housing Start data. Especially when an increase in Housing Starts is a cyclical increase due to the end of Winter in the
But investor focus was solely on the Federal Open Market Committees (FOMC) release of their October Monetary Policy report Tuesday afternoon.
Following 2 decreases to Interest Rates, pressure on mortgages had eased and investors were looking forward to some support from the FOMC to justify the recent lowering of rates, and the potential that another decline might occur in coming months.
This was clearly negated when it was found that the FOMC stated they were “unsure” whether to lower rates recently. Investors were confused by this, and left wondering what their next move would be.
At the same time, however, the FOMC decreased their outlook for growth of the economy in 2008, so this should lead to the potential of a lowering of interest rates early in 2008. For the time being, don’t count on another interest rate decrease for 2007, however.
Commodities spike upwards while the USD continues to fall …
Both Crude Oil and Gold prices pushed upwards over the last week, following some mild profit taking the week before. Precious metals (such as Gold and Platinum) continue to trade at high levels, however, other metals are down on their 12-month highs.
The cost of Crude and Gold, however, will have the major impact on the
There is no doubt that this is likely to put pressure on the economy if it continues trading higher. There are concerns that this might put added pressure back onto inflation, as it will lead to an increase in prices of most goods and services around the country (and the world), fuelling the “global inflation” concerns that many economists have been discussing for some time now.
Hurting the
At the same time, statements from organizations such as OPEC (Organization of Petroleum Exporting Countries) where they are investigating the potential to change their base measurement from the US dollar to the Euro (or a mix of currencies), could lead to the end of the USD global domination.
A huge week ahead for Economic reporting …
Ready to create more volatility for investors is a large number of key economic reports scheduled for release in the coming week:
- Consumer Confidence: 10am Tuesday 27th
- Durable Orders: 8.30am Wednesday 28th
- Existing Home Sales: 10am Wednesday 28th
- Fed Reserves Beige Book: 2pm Wednesday 28th
- GDP Preliminary data: 8.30am Thursday 29th
- New Home Sales: 10am Thursday 29th
- Personal Income and Spending: 8.30am Friday 30th
- Core PCE Inflation: 8.30am Friday 30th
- Construction Spending: 10am Friday 30th
All have the potential to incite volatility into the markets, and all will be closely watched by most market participants.
Volatility has steadied, but not down and out …
A revision of the CBOE Volatility Index (VIX) shows us that it has slowed over the last week, steadying at high levels above 25 points.
The VIX is referred to as the “Investor Fear Gauge”, showing when the markets are afraid there may be strong violent movements. It works opposite to a market index such as the DOW Jones or S&P500 indexes. When it is high, investor fear is high, and this typically leads to bearish market activity. When it is low, investor fear is low, and this can usually find steady upwards trending markets.
For the last few weeks, the VIX has been trading above 25 points, reaching a high above 31 points on the 12th of November. To put this into perspective, the index traded up to 37 points in August when the markets reacted severely to the Subprime news. These are the highest levels this indicator has traded in the last 4 years, and has not been above these levels since the 2000 Tech Wreck which triggered a 3 year Bear market.
Due to this evaluation, investors should remain cautious of further potential of the markets retracing.
FMR Analysts Outlook …
Despite a mild rally at the end of the week, there are no signs that the markets have found sufficient buyer demand to look at reversing the downwards trend. Even if there were a market rally early in the week, investors should remain bearish until there is a confirmation of change in trend.
Bulls have one potential sign at the moment, and that is that the major averages are trading at support levels after a 10% decline. Many investors might find this to be a good “accumulation” point for bargains. However, there has been a great deal more negative backlash from the Subprime credit crunch, so investors need to be aware.
Should the markets continue to decline, a move of more than 10% on the major averages will almost certainly denote a “Bear Market”. So it is now crunch time!
The S&P500 index is only just holding onto a mild gain for the year so far, while the Russell2000 index is now in a loss. Technology stocks have remained the strongest sector, but if the broader economy moves towards Recession (yes the big R word!), will this take the wind from out of their sails? Most likely yes!
For the time being, however, investors need to maintain the current Bearish trend as the predominant influence, only changing this opinion when we physically have proof of a changing trend.
FMR Strategy Analysis …
Trading: Short-term traders should be trading Bearish strategies at the moment. Should a short-term rally occur, look for strong reversal patterns as the trigger to enter new Bearish positions.
Investing: Investors should not be buying stock right now. There are no signals that the Bulls are willing to re-enter the markets with enough gusto to push an upwards rally. Protection strategies should already have been adopted a few weeks ago (as per the FMR weekly report). Current positions could be held, though investors need to consider the potential that further downwards activity may present itself over coming months.
Option Writing: Covered Call writers could still enter positions, however, only if aware that there is still potential that stock prices will retrace. Naked Put writers should be extremely cautious, and not enter into positions for now. There are 4 weeks left for the December07 options, which is ideal for entry into new positions. However, the markets hold a higher risk at the moment, especially for Put writers. Writers could consider ITM Covered Put writing strategies.
