US Market Report – week ending 30th November 2007
By Matthew Brown
Buyer demand returned to the markets following the Thanksgiving Day holiday weekend. Investors bought up oversold stock on expectations that the Federal Reserve will lower Interest Rates for a third time. The Financial sector led the recovery, while lower Crude oil prices offered additional encouragement.
Investors found cause to accumulate stock over the last week, giving the major averages a much sought after rally. In particular, Tuesday and Wednesdays activity was a strong attempt to break the downward trend that has persisted for more than a month.
The Russell2000 index, which represents the broader market, gained more than 4.6% over those 2 trading days. The NASDAQ index also gained more than 4% midweek, while the S&P500 index gained more than 5% from Tuesday to Friday, and the DOW Jones index fell just short of 5%.
Buyer demand slowed into the end of the week, however, led with some selling pressure in leading Technology stocks on Friday. This means we are currently at a “pivotal point” for medium-term trend definition.
What we have at the moment is a medium-term downward trend, with a strong short-term rally. The short-term rally is not a “break of trend”, at this stage. And with the weak buyer activity into the end of the week, could lead to a Bearish reversal that continues the medium-term downwards trend.
If, however, strong buyer activity continues into the beginning of the next week, this might lead to a break of the medium-term trend.
Since the peak in early October, we have seen the markets retrace 10%, only finding some buyer support in the last week of trading. If buyers persist, than it is likely we may find the markets holding onto a long-term sideways trading range. This is because investors have proven that they aren’t willing to push the markets higher than the levels found in early October, and possibly have found a lower level in which they are not willing to drive the markets any lower.
Strong selling pressure at any stage in the coming week would more than likely form a Bearish reversal point, causing a lower
Financial stocks finally find some relief …
After nearly 5-months of retracing due to the implications of the Subprime lending market, Financial stocks finally found some relief over the last week, recovering more than 5% on strong buyer accumulation.
Using the Financial Select Sector SPDR index (code: XLF) as our benchmark, we have seen this index lose more than 26% since early June. This sector has been the major cause for the markets slumping twice in the last 6-months, but was also the influence behind the rally this week.
A major stake in global leader C (Citigroup) was announced on Tuesday, with the Abu Dhabi Investment Authority stating they would be investing $7.5 billion to acquire 4.9% of the company.
Other notable Financial stocks in the news this week included FRE, FNM and BCS. All three found strong buyer accumulation on positive announcements that has led investors to perceive that the worst of the “Credit Crunch” may be over.
Financial stocks also found buyer activity on expectations that Interest Rates may be cut. This is a sentimental factor, however, which incites caution at this stage.
FOMC meets on December 11 …
After lowering base Interest Rates a total of ¾ of a percent at the last 2 FOMC (Federal Open Market Committee) meetings, investors are expecting a further lowering of rates on December 11.
Federal Reserve Chairman Ben Bernanke spoke at a Charlotte Chamber of Commerce meeting, hinting that another lowering of rates might be in order sometime soon. Key points of the speech included:
- A worsening Credit Crunch, deepening housing slump, and rising energy prices are likely to create headwinds for consumers in the months ahead
- Expects consumer spending to continue to grow, with the economy able to withstand falling into a recession
- However, odds of a recession have increased
- The FOMC will need to remain exceptionally alert and flexible
The economic outlook has been importantly affected over the last month by renewed turbulence in financial markets. These developments have resulted in further tightening in financial conditions
The FOMC’s 2nd in command had also addressed the potential that interest rates might be lowered. On Tuesday, Donald Kohn suggested the FOMC might lower rates due to Wall Street’s reaction to the problems in the housing and credit markets.
With the 2 top leaders of the FOMC suggesting a lowering of interest rates, investors flocked to oversold stocks.
Economics is the key word …
It was an impressive week of economic announcements. Aside from the comments from Bernanke and Kohn, there was the release of data for Consumer Confidence, Existing Home Sales, Durable Orders, the Fed’s Beige Book, GDP Preliminary, New Home Sales, Personal Income and Spending, and the Core PCE Inflation indicator.
The Core PCE Inflation indicator is one of the key pieces of data that the Fed reviews to determine Monetary Policy. It was up 0.2% in October, which is a 1.9% increase year over year. The Fed attempts to keep this figure between 1.0 and 2.0%, so at this stage, this does not support the potential of an interest rate decrease.
But it was the Fed Reserves Beige Book that most investors were keen to read. The message from the late October FOMC meeting was that the economy was moving at a “slower pace”, which did not tell the markets anything new. However, a slower economy could help influence the Fed to lower Interest Rates, so investors continued to buy oversold stocks on the news.
Next week will the release of the Unemployment report on Friday before market open. This is one of the key economic indicators to measure the strength of the economy, and will be closely watched by many investors.
FMR Analysts Outlook …
There is no denying that this last week was a strong buyer reaction. But there are 2 factors that are continuing to support the current medium-term downwards trend: 1) the slowing buyer activity heading into the end of the week, and 2) investor fears that the economy is slowing significantly and could be a Bearish market in 2008.
Our biggest concern is that the buyer activity experienced in the last week may just have been Short Sellers covering their positions, and that this will find sellers coming back to the markets on negative news through the coming week.
Due to trend definition on the major averages, FMR Analysts will maintain a medium-term downwards trend outlook. Until such time as we have signs of a break in trend. The short-term trend is Bullish, against the medium-term trend, and is a conflicting signal.
The coming week is pivotal for medium-term trend definition. There is potential the markets could trade up or down, so investors will need to remain vigilant.
Maintain a Bearish outlook for now, but do not be surprised if there is further buyer activity.
FMR Strategy Analysis …
Traders: Look for Bearish opportunities on a short-term reversal of the major averages.
Investors: Hold positions, but do not accumulate stock positions just yet. The current rally does not suggest a Bull market at this stage.
Option Writers: There are 3-weeks until December expiration. Still high risk in entering new positions, and with market direction suspect, difficult to choose positions. Volatility is falling, which is positive for writers. Therefore, Call writers may be able to enter into lower risk positions.
