US Market Commentary – week ending 25th January 2008
The FOMC drops interest rates an unprecedented 75 basis points during one of the most volatile trading weeks experienced in a decade. Many earnings outlooks continue to show weakness heading further into 2008, but the markets were able to show some mild buying activity to close the week in the positive.
The big news of the week was the staggering ¾ percent decrease in Interest Rates to 3.50%. Following the Martin Luther King public holiday on Monday, investors returned to the news that the FOMC (Federal Open Market Committee) had lowered interest rates in an effort to stimulate the economy.
European markets had dumped heavily while the
Investors were shocked by the lowering of interest rates as the FOMC is scheduled to meet this coming week, and were expected to lower rates all the same. This rare activity of an early announcement only shows how concerned the Federal Reserve are that the economy could fall into a Recession.
In their statement, the FOMC said they “took this action in view of a weakening of the economic outlook and increasing downside risks to growth" and that, "appreciable downside risks to growth remain."
Many economists are expecting the FOMC to lower rates again on Wednesday, adding further stimulation for investors.
A Counter-Trend rally …
Although it was an extremely volatile week, buyers were able to dominate enough to post gains on the major averages. The Russell2000 index was able to produce an 8.3% gain for the week, whereas the other major averages only showed a mild rise.
The Russell2000 index, which has retraced more than 20% since the peak mid last year, has formed a Piercing Line candlestick pattern at a support level from a previous low point from mid-2006.
Trading in the coming 2 weeks will denote whether or not this support will hold, or if this is a counter-trend rally against the a 3-month medium-term downwards trend.
Sentiment from the last week would suggest that investors are more willing to buy oversold stocks, however, caution must be taken as there was a lot of “short covering” this week. Short Covering is where traders who are “Shorting the market” (profiting from falling stock prices) are exiting their positions. To do this, they Buy Back their Short position. This accumulated buying helps lift stock prices.
For the time being, investors must remain cautious because 1-week of rallying does not make a trend. Technically, this is classified as a “counter-trend” movement and until such time as a new trend forms, should not be traded.
Thus, we may find another week or two of rallying markets, but according to trend experience, we should be monitoring for signs that sellers are re-entering the markets.
Volatility traded back to record high levels …
The CBOE VIX index (Volatility index) is considered the “investor fear gauge”. When it is trading high, investors are fearful of further falling markets. When it is low, investors are comfortable with the markets, and we typically find a steady upwards trending scenario.
In the last week, the VIX index rallied up to its highest level in 5-years. In fact, its highest level since the 2000 Tech Wreck when the Technology bubble burst with an almighty bang!
This is the second time in 6-months that the VIX has traded up to this level, denoting the strong level of fear from investors. It eased over the last few trading sessions but remains at high levels.
For the avid investor/trader, this is a clear confirmation to be cautious for the time being. There is still a reasonable potential that these markets might continue the medium-term downwards trend, with strong fluctuations from day to day.
Earnings results are generally poor …
With a strong week of earnings reports behind us, investors will be looking to the week ahead for further clarity to the state of the economy. Some big Technology companies reported this week, including AAPL, EBAY and MOT (both of which had reported a weaker outlook).
The Feds decision to lower rates took the focus away from these earnings results, but this will only be for a short-time. In the week ahead, the following earnings reports are likely to be influential to the broader market:
| Monday | |
| AXP | Time not Supplied |
| HAL | Before Market Open |
| MCD | Before Market Open |
| VZ | Time not Supplied |
| Tuesday | |
| MMM | Time not Supplied |
| CAH | Before Market Open |
| CFC | Before Market Open |
| LLY | Before Market Open |
| LXK | Before Market Open |
| OXY | Before Market Open |
| DOW | Before Market Open |
| X | Time not Supplied |
| USG | Time not Supplied |
| VLO | Before Market Open |
| YHOO | Time not Supplied |
| Wednesday | |
| MO | Time not Supplied |
| AMZN | After Market Close |
| HMC | 1:00am ET |
| LIHR | Time not Supplied |
| MRK | Before Market Open |
| SBUX | After Market Close |
| BA | Before Market Open |
| UPS | 7:45am ET |
| Thursday | |
| BMY | Time not Supplied |
| CL | Before Market Open |
| GOOG | After Market Close |
| LLL | Before Market Open |
| MRO | Before Market Open |
| MA | Time not Supplied |
| PG | Time not Supplied |
| SNE | Before Market Open |
| Friday | |
| XOM | Before Market Open |
| ERIC | Time not Supplied |
Of particular interest are the Technology and Oil sectors. Investors should watch the market reaction to results from companies related to these 2 sectors for clarity on broader market confidence.
Economic activity …
In the last week, there was literally only 1 economic announcement for investors to be concerned with. On Thursday, Existing Home Sales figures were released. Poor results show that there was a decline of 2.2% from December, while the median sale price of existing homes was down 6% from the same period a year ago.
For the week ahead, there will be far more exciting activity to monitor:
| Monday | New Home Sales |
| Tuesday | Durable Orders |
| | Consumer Confidence |
| Wednesday | GDP Advanced |
| | Chain Deflator Advanced |
| | FOMC Policy Statement |
| Thursday | Personal Income/Spending |
| | Core PCE Inflation |
| | |
| Friday | Auto/Truck Sales |
| | Unemployment |
| | |
Of note, the FOMC Monetary Policy statement and Unemployment data will be key to investor confidence. Advanced data for GDP and Inflation will also influence investor confidence.
Analysts Outlook ….
Volatility was the key to the markets last week, and it is likely to remain much the same this coming week. With some key economic and earnings reports scheduled throughout the week, investors will be awash with information.
If the economy is truly slowing, as many economists are suggesting, then we should continue to see poorer earnings outlooks. The economic data should also continue to reflect much the same.
For this reason, we would put more weight into the markets finding renewed selling pressure in the week ahead. Volatility will remain, and we may even find buyers lifting the markets on positive news, however, last weeks activity was not as bullish as one would have expected a ¾ point drop in interest rates to provide.
Some mild buyer activity may continue. The probability is low, but with so many key reports scheduled, investors might be surprised. The key to the week will come on Wednesday with the FOMC monetary policy statement. If they lower rates again, investors will buy up stock.
Strategy Analysis …
This lends opportunity for the avid investor/trader. Monitor the markets for weakness in sentiment. Should sellers begin to enter the markets, adopt Bearish strategies. Continued buying activity should not find any participation at this stage due to the “counter-trend” nature of the movement.
Traders: adopt bearish, short-term, strategies. Monitor for a Bearish reversal of the markets to enter new positions.
Investors: Hold. Do not accumulate stock at this stage, as 1 week of upward activity does not mean recovery is underway. Long-term portfolios that are unprotected could have Put options purchased for protection. Concerned investors may use this rally as an opportunity to exit.
Option Writers: Maintain Covered Put positions. Do not enter Covered Call or Naked Put strategies.
