US Market Report – week ending 11th January 2008
Earnings season hits the markets at a time when investors are attempting to dodge a “recessionary bullet”. Signs of some positivity failed to abate investor fears, however. Selling pressure continued through the week, denoting a market downtrend.
Investors were uncertain as market activity resumed on Monday 7th January. Majority of traders, investors and market participants were now completely back from their Christmas/New Years holidays, and began taking account of the market activity that occurred over the previous few weeks.
As FMR Analysts had reported in last weeks market report, the retracement of the markets up to that point was at a pivotal point. Having retraced to a strong medium-term support level, a return of buyers was likely to produce a medium-term sideways market. However, sellers have persisted overall, and this validates signals for further Bearish activity.
The S&P500 index, which is considered the benchmark for economic performance of the
Cross analysis of the Russell2000 index accentuates the same picture. This broader index has broken support levels, formed a downwards trend and is also preparing to breach the next support level, which would clearly denote a change in the long-term trend.
All-in-all, the signals for investors are add up to a strong probability of a Bear market occurring.
Sentiment has sided with the Bears, but there is always HOPE ….
The CBOE VIX index, commonly referred to as the “investor fear gauge”, has rallied significantly over recent weeks. With the markets retracing heavily of late, we would have expected much stronger upward activity on this index, however, there has been some consolidation in recent days.
Certainly the Wednesday/Thursday rally experienced due to stronger earnings announcements, and possibly from “bottom fisher’s” accumulating stock at low prices, may have contributed to the activity on the VIX. But with earnings season only just starting, and a large degree of uncertainty still remaining in the Financial sector, we do not expect the VIX to ease significantly on the short-term.
Investor sentiment has at a deep low right now. They are hesitant to accumulate stock while so much negative news activity remains, and with a high level of uncertainty in their outlook for 2008, investors are not willing to commit additional funds to the markets right now.
Hope remains the only factor for sentiment right now. Hope that earnings season will produce stronger than expected results, and hope that the Subprime/CDO influence on Financial earnings has already seen its worse affect on the markets.
Activity from the past week …
Market activity from the last week was shaped by continued concerns for the Financial sector, fears that the Retail sector has performed poorly over the Christmas/New Years period, stronger signals that the US Economy is shifting closer to a Recession, and reserved anticipation for earnings results over the coming weeks.
Following are some of the headlines from the past week:
· Rumours that CFC was looking to file bankruptcy papers sent the markets falling on Tuesday. However, on Thursday an announcement was made from BAC that they will purchase the struggling mortgage lender for $4 billion.
· Telecommunications giant T (AT&T) announced on Tuesday their business was under-performing due to the slowing economy.
· MBI cut its dividend as the Insurance company struggles following the Credit Crunch. They will also be attempting to raise $1 billion of new debt.
· AA released their earnings report after market close Wednesday. Results were stronger than expected, raising investor hopes for a good earnings season.
· Fed Reserve Chairman Ben Bernanke gave a speech on the economy Thursday. He said “additional policy easing may be necessary, and that the Fed stands ready to take substantive additional action”.
· The Bank of England and the European Central Bank kept their Interest Rates steady.
· COF decreased their profit outlook for the 4th quarter 2007.
· Many Retailers have reported disappointing same-store sales for the last quarter. However, leaders WMT and TGT have reported good results.
Looking ahead …
Economic data and Earnings reports will be the major influence for the week ahead.
On Tuesday, Retail Sales figures for December will be released. The impact of a slowing economy will either be confirmed or negated with how much spending activity consumers undertook during the holiday season.
Also on Tuesday, the PPI (Primary Producers Index) will be released. This report helps outline economic inflation. Economists will be looking for signs that 2008 is heading into a Recession.
On Wednesday, the all important CPI (Consumer Price Index) will be released before market open. Again, this report is critical in measuring economic inflation and is one of the key 5 indicators to measure the strength of the economy.
Later on Wednesday, the Federal Reserve will release the Beige Book – notes from all of the country’s Federal Reserves. Analysts will scour this report for hints the Fed may lower/raise rates at their next meeting.
For Thursday, focus will switch to the Housing sector as Housing Starts and Building Permits will be released before market open. The Housing and Construction sectors have suffered from a falling market and the recent Subprime/Credit Crunch.
There are other reports scheduled through the remainder of the week, but will not carry as much important as the above.
Earnings reports of interest, and which may have an impact on market movement, include:
| Tuesday | |
| C | Before Market Open |
| INTC | Time not Supplied |
| USB | Before Market Open |
| Wednesday | |
| JPM | 07:00 am ET |
| WFC | Before Market Open |
| Thursday | |
| AMTD | Before Market Open |
| BK | Before Market Open |
| | Before Market Open |
| IBM | After Market Close |
| MER | Time not Supplied |
| WM | After Market Close |
| XLNX | After Market Close |
| Friday | |
| GE | Before Market Open |
| SLB | Time not Supplied |
There is a heavy influence from the Financial sector in earnings releases this week. Therefore, we could expect a great deal of volatility, and a high probability of further negative influence on the markets as a whole.
FMR Analysts Outlook …
Market negativity has continued, and strengthened the outlook for the Bears. Some mid-week buyer relief came on some positive news, but failed to find any follow-up. Investors are extremely nervous that the economy is sliding into Recession, and this is leading to greater profit taking on any short-term market rallies.
The coming week is likely to be just as volatile as the week we have just experienced. A plethora of news events is just on our doorstep and is likely to give us a mix of positive and negative results. This truly is a tough period for the beginner investor/trader to consider entering into new positions.
Based on analysis of the economic reports and earnings results scheduled for release this coming week, FMR Analysts is expecting the Bulls to continue maintaining control. There is heavy weighting to the Financial sector in earnings results, while Housing data is not likely to produce any surprises. The release of the CPI, PPI and Fed Beige Book could find some relief buying, but expectations are that Bears will push the markets following this data.
Investors are already flocking to the “safer” sectors as the markets have shown a lack of effort in recovering on positive news. This in itself should be a reasonable sign for caution.
Options Expiration will occur at the end of this week, as well as an extended weekend due to a US Public Holiday on Monday the 21st January. Investors are not likely to want to hold onto stocks heading into the long-weekend, while Options Expiration will see a large increase of activity as traders/investors look to Roll/Reverse/Exit positions before expiration.
FMR Strategy Analysis …
Traders: Continue to adopt short-term Bearish strategies, using any short-term upward movements as a set-up for entering new bearish trades (only once bearish reversal alerts have been given).
Investors: Downsizing of investment portfolio’s and adoption of risk protection strategies is imperative at this point. Each week the probability of a Bear market strengthens as the economy fails to produce substantial evidence to warrant accumulating stocks at these lower values.
Option Writers: January expiration is coming up this week ending. Many of you may need to make some “hard” decisions on whether to close positions, or let them be exercised. Take into consideration the high risk of the markets at the moment when making your decision. Covered Put Writing is the safer choice for writers at the moment, while Covered Call and Naked Put strategies have a large level of risk for the next month.