US Market Report – week ending 9th November 2007
A market “Correction”, led by the Financial sector has the S&P500 index down 8% from it’s recent high, the Russell2000 index down more than 11%, and the CBOE VIX (Volatility index), trading back up towards its high levels from August. Does this mean more market negativity to come?
Over the last few weeks, FMR Analysts have been reporting that there has been a reasonable potential for continued Bearish market activity. We have warned investors to enter protection strategies, close out of positions if they are worried, and to limit option writing positions (in particular naked put option writing).
The markets over the last week have proven the level of fear encompassing the current market conditions, with the major averages slipping into new 3-month lows, and even the stalwart Technology leaders such as AAPL, GOOG and MSFT have fallen to profit taking.
Will the Bears hibernate this winter? …
Although we do not yet have a defined Bear market, we certainly have a slowing to the Bull market that started in early 2003.
The major averages are all showing us resistance at higher levels. The recent high points achieved on the S&P500 (1,576) and Russell2000 (852) indexes, stalled at the previous high points from June/July. This suggests that buyer demand at these higher levels is weak at best, with no real desire to want to buy stocks up.
As many readers are aware, the Financial sector has been the leading cause of this market pullback. An evaluation of the Financial sector ETF (Exchange Traded Fund – similar to an index), shows the impact.
XLF – the Financial Sector Select SPDR (index), has retraced more than 20% since early June. It is now trading at a 2-year low, and by all reports, is not showing much potential of stabilizing any time soon.
At the very least, it is almost time to say that the 4 year Bull market we have experienced since 2003, could very well be at an end!
Interest Rates have been lowered twice in the last 2 months, in an effort to avert a Recession. If the powers that be thought the economy might slip into a Recession, even with the lowering of Interest Rates, will this still prevent the markets from relieving some of the gains made over recent years?
On the one hand, we have lower Interest Rates attempting to influence continued spending. On the other, we have Crude oil and Gold prices trading at record highs, a market that does not seem to have the buyer strength to continue trending upwards, and investors who fear a Recession.
FMR Analysts see very little reason for the markets to resume their previous Bullish direction based on the current data, with a higher probability that the Bears will be active for the Winter. Maybe a touch of “climate change” is starting to affect the market seasons!
Inflation data scheduled this week …
The true test of investors’ faith will come with the release of the PPI (Primary Price Index) before market open Wednesday, and the CPI (Consumer Price Index) before market open Thursday.
Both sets of data indicate whether Inflation is pushing the prices of goods at a Wholesale level (Primary) and at the Consumer level. Investors will be looking for an easing on Inflationary pressures to support the cause of lowering Interest Rates.
If we were to find that Inflation continued to rise, or at least come in stronger than expected, then this would be a mixed signal against the lower Interest Rates experienced recently.
As previously mentioned, Interest Rates were lowered to help push the economy along in light of the Credit Crunch felt in the Financial sector. But if Inflation is continuing to rise, the Federal Reserve will reach a point where they have no choice but to lift Interest Rates again.
The economy is balancing on a very fine line at the moment. Investors’ nerves hinge on whether there will be continued growth that will drive stock prices up, or if a slowing economy will stunt the growth of the markets, possibly even leading to a bearish activity.
Volatility is back …
In early October, we had seen the CBOE Volatility Index (VIX) retracing back from long-term highs. But now the “investor fear gauge” has rallied back to the previous highs, suggesting investors are expecting further market negativity.
The VIX is used as a guideline on investor fear. When it is trading at higher levels, there is more volatility, typically resulting in greater potential for a market retracement. At lower levels, the VIX represents a steady market.
Some volatility is needed in the markets. It helps the short-term trader profit from fluctuations, causing stock prices to rise and fall, and subsequently option writers can gain higher premiums. However, extreme volatility is a worrying sign for all market participants.
At the current levels, the VIX indicator is offering signs that further bearish activity is likely to persist.
Key announcements from the last week …
Following are a list of the key announcements that influenced trading activity:
- Citigroup (C ) announces they “anticipate recording a write-down of approximately $8 billion to $11 billion for its 4th quarter. Fears of more write-downs in the Financial sector, with the 3rd quarter not marking the bottom for the financial sector. C shares trade more than 5 times their daily average on Monday 5th November.
- WM accused by New York Attorney General of pressuring real estate appraisers to inflate appraisal values
- FNM and FRE subpoenaed in real estate appraisal investigation, over information on mortgages bought from WM.
- Royal Bank of
- GM reported 3rd quarter loss of $39 billion, after writing down the value of future tax benefits. GM lost $2.80 per share, fuelled by mortgage related losses in GMAC
- US dollar continues to weaken against most global currencies
- Crude Oil hits record highs of $98.10 a barrel
- Gold peaks at $847.50 an ounce
All in all, not much to incite the Bulls to enter the ring, and subsequently, there was heavy selling pressure throughout the week.
FMR Analysts Outlook …
We continue to maintain a “Bearish Expectation” as investors experience the 2nd major market retracement in 4-months.
The major averages have retraced to their previous lows, which we need to monitor. If they stabilize around current levels, we may find the markets are shifting into a Consolidation pattern at the top of the Bull market. If selling pressure persists through the coming week, then we have potential for a Bear market to form.
Earnings season is all but over. Majority of the leading companies have reported, though there are still a large number yet to release details. Therefore, investor focus will return to market Economics, and with PPI and CPI data scheduled for release this week, investors will nervously wait for incite into the strength of the economy.
It will be lucky if we do not get further news regarding the impact of the credit crunch to the Financial sector. If the week goes by and there are no announcements, then this could find some buyer influence from “bottom fishers” – those who buy up stock on market dips.
But be aware, a week without any major market announcements on the impact of the credit crunch is likely to find a greater reaction from investors at a later date.
Be prepared for further selling pressures, but also expect buyer relief. If the latter occurs, further selling pressure is likely to persist in coming weeks.
FMR Strategy Analysis …
Bears are dominating the markets, and have formed short-term trends. But medium/long-term direction is unconfirmed.
Bulls: For the time being, there are no signs for Bulls to be considering entry into the current markets.
Bears: Bears dominate, with a high probability of continued downwards activity. The coming week will be crucial as the major averages trade on support. Do not be surprised if we have a neutral week, maybe with some buying activity. If so, monitor for a return of the Bears to confirm next leg of trend.
Investors: Continue to enter into protection strategies for stock positions. Put premiums will be slightly higher now that the markets have continued to retrace. Do not “accumulate” stock at this stage, as there have been no signs of slowing seller pressure.
Traders: Continue to consider Bearish reversal alerts for either CFD or Option traders. Look to enter positions if the markets continue to show bearish activity.
Option Writers: November options expiration approaches this weekend. Evaluate positions before market close Friday, and close written positions if you do not want to be exercised. Consider writing Call options (At The Money) against stock currently held, in an effort to lower average price paid. Do not enter into Naked Put positions at this stage, due to the high probability that further selling pressure will persist in the markets.
