US Market Report – week ending 28th December 2007
Heading into Christmas, investors lifted the markets in a relief rally suggesting 2007 may end on a positive note. However, trading activity in the final week of the year has been anything but positive.
Numerous factors have led to a sell-off in the final trading days ahead of New Year:
- Fear Retailers will not reach sales targets
- Auto Manufacturers posting poor 2007 results
- Continued weakness in the Housing sector
- Uncertainty with Financial stocks, and
- The Assassination of Pakistan’s opposition leader Benazir Bhutto.
This latter point is of great concern to the
Analysts at research firm Goldman Sachs (GS), reported that they expect Financial heavy weight C (Citigroup) to cut its dividend by 40%. At the same time, Goldman also wrote down their earnings estimates for JPM and MER.
On the economic front, Durable Goods orders (also released on Thursday), increased slightly by 0.1%. Though, not as strong as some economists were expecting (2.2%). Still, this data does not suggest a “recession”, which might actually boost the concerns of those worried that Inflation will be a major factor heading into 2008.
Crude Oil prices have also traded back up to their long-term high prices, trading just under $100 a barrel at $96.00 (as at close Friday 28th Dec). This is one of the leading influences on Inflation at the moment. As the
The Markets are consolidating …
Activity of the major indicies over the last week suggest a new sideways trading range may have emerged. Following the heavy retracement of the markets through November, 2 short-term rallies have met with resistance. This suggests investors are not eager to accumulate stocks at the moment.
The Russell2000 index has found resistance at 800 points, following strong support around 735 points. It would appear that a short-term trading range has formed at 18-month lows.
Should sellers continue to influence the markets early in the New Year, there is a strong potential that these sellers will attempt another break downwards. Most market participants will be very wary of this, watching the markets intently in the next week and a half.
This activity is very similar to the consolidation we had experienced in August September, following the major market reaction to the Subprime fallout. Investors will be looking for some major news to influence market direction. There may be an attempt to rally, but in the same fashion we had experienced only 4-months previously, FMR Analysts does not expect that rally to result in a Bull trend.
Volatility back on the rise …
For the 2nd half of 2007, the CBOE Volatility Index (VIX) has remained in a long-term high trading range. There had been some relief heading out of November and into December, but we are again experiencing a rise in this “Fear Gauge”.
Should the VIX index continue to rise on the short-term, this would suggest a continued downward market is highly probable. Investors should be wary of this, and look for opportunities to decrease position sizes, or adopt protection strategies where necessary.
Heading into 2008 … FMR Analysts Outlook
The beginning of the New Year is likely to be just as exciting (and interesting) as the end of 2007.
The markets are consolidating at the moment, and most news activity seems to be hinging on the negative. Especially towards Retail Sales numbers (for the Christmas period), and the Financial sector.
Finance stocks are not out of the woods just yet. Despite the fact that the markets have not reacted bearishly towards negative news in this sector over the last 2 weeks, FMR Analysts are still expecting further fallout towards the Subprime/CDO (Collateralized Debt Obligations).
At time of writing (New Years Eve), there had been no positive news reports for the Retail sector. The “buying rush” retailers had been hoping for before Christmas, and again post-Christmas, never eventuated.
This could be a clear sign to the business community that Consumer Spending has been put on hold. Those analysts expecting a Recession will agree that this would be the trigger to a Bear market through 2008.
We would like to say that “not all is doom and gloom”, but there is very little positive activity that we expect to kick-start the new year. The strongest sectors over recent months have been in Technology, but if Recessionary conditions prevail over coming months, not even the likes of AAPL, GOOG and MSFT will be able to withstand the barrage of panic sellers.
FMR Strategy Analysis …
Traders: With a short-term bearish reversal over the last two trading session, at Resistance, this is a trigger for short-term Bearish strategies. Don’t be greedy with the profits, however, as there is a very strong support with these markets. Set your profit targets, and be prepared to exit Bear positions should a higher low form on the major averages.
Investors: The recent market rally has given investors an opportunity to decrease position sizes, and/or enter into new Protection strategies (if you haven’t already done so). The markets are consolidating right now, however, there is a heavy weighting towards a Bearish outlook for the next few months.
Option Writers: ITM (In-The-Money) Covered Put positions (a conservative strategy) should be considered due to the higher risk of a falling market. Covered Calls, whether ITM or ATM, hold too much risk right now. Naked Put writers should also remain on the sidelines for now. Should the markets retrace to support and hold (this is a very important factor), this might offer an opportunity to enter conservative Covered Call or Naked Put positions. For now, however, while a Bearish outlook remains, Covered Puts appear to be a safer strategy.