US Market Report – week ending 18th January 2008
Doom and Gloom! Bears take control of the markets for another week, resulting in a 4th straight week of losses. Financial stocks were pummelled while the market stalwart, Technology, found little incentive to hold its ground. Now, with the major averages maintaining a 15% decrease since last years highs, do we have a clear definition of a Bear market?
Monday the 21st January is a
For the week that was, there was little to incite investors to accumulate stocks. Those who have been expecting a market bottom would have bought into stocks early in the week after IBM triggered buyer activity on a strong earnings report.
However, this positive activity failed to lift the markets from Tuesday onwards, resulting in another strong downwards push on the major averages:
- DOW Jones Industrial Average: -4% for the week
- NASDAQ index: -5.2% for the week
- S&P500 index: -5.5% for the week
- Russell2000 index: -4.6% for the week.
Medium-term support levels have all been breached for each of the above mentioned indexes, with clearly defined lower highs and lower lows. Therefore, downward trends are now the predominant medium-term trend for the
Using the Russell2000 index as our benchmark for performance, there has now been a decline of more than 20% since the peak that formed mid last year. This index has retraced to a support level that had formed in mid-2006, and unless there is some real incentive for buyers to return, has a strong probability of continuing to trend downwards.
By all accounts, this is a Bear market. Even the announcement by President Bush of a Fiscal Stimulus package worth $140 billion did little to entice investors back to buy.
Investors were hit with a double whammy this week. Not only did earnings season cause widespread panic, but poor economic reports showed the economy slowing at a manufacturing level as well as with consumer confidence.
We had highlighted the fact that Financial stocks would be in the headlines this week due to the large number of companies from that sector reporting earnings. As we had expected, the Financial sector retraced 2.5% on a continuation from the previous weeks decline of more than 5%.
Highlights from the last week:
| Monday | IBM releases earnings details, lifting the markets |
| Tuesday | C (Citigroup) earnings decline Financial sector falls 3.7% Retail Sales figures show slowing in spending |
| Wednesday | INTC earnings fall, dragging markets down CPI released, coming in as expected at 0.2% |
| Thursday | Philadelphia Fed Index declines a whopping 20.9 points. The lowest level since Oct ’01 (expectations were 1.5 point decline) MER earnings decline Housing Starts and Permits figures fall |
| Friday | GE earnings decline Insurers drag markets down (ABK and MBI) S (Sprint Nextel) earnings decline President Bush announces fiscal stimulus package of $140 billion |
Economic announcements played a major part in the confidence of investors through the last week. Some of the most influential data was released, right at a time when investors were also disappointed with earnings results. Hence the heavy fall in the markets.
The coming week, however, there is very little in the way of economic reporting. The only real influential report is due on Thursday 24th, just after market open, with the Existing Home Sales for December. If last weeks housing data is anything to go by, we should expect a great decline in this figure than expected, causing the markets to find sellers, especially in the Construction, Housing (Real Estate), and Mortgage lending sectors.
Earnings season is in full swing ….
The first heavy week of releases has resulted in a strong market decline.
| Tuesday | |
| ABK | Before Market Open |
| AAPL | After Market Close |
| BAC | Time not Supplied |
| CREE | Time not Supplied |
| FITB | Before market Open |
| JNJ | Time not Supplied |
| TXN | Time not Supplied |
| UNH | Before Market Open |
| WB | Time not Supplied |
| Wednesday | |
| COF | 4:05pm ET |
| COH | Before Market Open |
| COP | Before Market Open |
| DAL | Time not Supplied |
| EBAY | Time not Supplied |
| FCX | Before Market Open |
| GD | Time not Supplied |
| GILD | After Market Close |
| MOT | Before Market Open |
| PFE | Before Market Open |
| QLGC | After Market Close |
| QCOM | After Market Close |
| LUV | Time not Supplied |
| STJ | Before Market Open |
| UTX | Before Market Open |
| VAR | After Market Close |
| Thursday | |
| T | Before Market Open |
| F | Before Market Open |
| LMT | Time not Supplied |
| MSFT | After Market Close |
| NOK | 06:00am ET |
| JAVA | Time not Supplied |
| XRX | Before Market Open |
| Friday | |
| CAT | Before Market Open |
| HOG | Before Market Open |
| HON | Before Market Open |
Again, this coming week will have a heavy influence from Financial stocks. Technology is heavily represented by AAPL and EBAY and MSFT, while some of the Blue Chip companies such as CAT, GD, and PFE are scheduled for release as well.
Analysts Outlook ….
There are only 2 reasons the markets may rally this coming week: 1) relief from selling pressure as stocks are viewed as “oversold”, or 2) earnings reports incite enough Bullish sentiment to trigger buyer accumulation.
Certainly, with the markets retracing heavily in the last 4 weeks, one would expect some buyer relief some time soon. And with the advantage of only 1 key economic report this week, all focus will turn towards earnings data.
Any Bullish activity this week should be viewed as a “counter-trend” movement. That is, a short-term rally against the medium-term downwards trend. Don’t be fooled that this will turn into a stronger upwards movement, resulting in a recovery in the markets. Until we have sufficient buyer activity over (at least) a few weeks, there could be no certainty that the markets will recover sufficiently to resume the previous Bull market any time soon.
Therefore, if the markets do rally slightly this week, investors/traders could use this as an opportunity to enter into new Bearish positions.
Probability is strong for continued selling pressure in the markets. Relief from that selling will occur some time over the coming few weeks, however, is not expected to be more than a short-term rally.
Strategy Analysis …
Traders: Anyone who holds a Bullish position right now is playing with fire. Look to take profits from Bearish positions this week, if a short-term rally occurs, and monitor for exhaustion turning into a new Bearish reversal.
Investors: Use any short-term rally as a means to exit stock positions, or enter into Protection strategies. However, the cost of put options will have increased dramatically in recent weeks, and may be too costly to adopt. There are no signs that the markets are finding a bottom, which confirms the need to exit positions and wait until this Bear movement is over.
Option Writers: January expiration occurred over the weekend, and writers will now be looking to enter into new positions. However, due to the trend and outlook of the markets, writing Covered Calls or Naked Puts are very risky strategies to adopt right now. To be conservative (during this time of high volatility), writers could consider ITM Covered Put positions.
