US Market Commentary – week ending 15th February 2008
A topsy-turvy week ended with neither Bulls nor Bears completely controlling the outlook. It was a week of consolidation ahead of a long weekend holiday, offering some hope that a market bottom may have been found.
But don’t rest all your “hope” on buyers returning anytime soon. With the last week starting relatively positively, sellers were dominant heading into Friday. Much of this sell-off was continued uncertainty surrounding the Finance sector and the outlook that the
Investors were given a shock wake-up call from Federal Reserve Chairman Ben Bernanke. On Thursday, in a speech to the US Senate Banking Committee, he alluded to the possibility that the
Hope for property investors, however, is that with the Fed expecting further slowing in the economy, Interest Rates will be lowered to help spur the economy on. We have already seen 2 large interest rate declines over the last month, with analysts factoring in a another lowering of rates in March.
Markets consolidate ….
Following a month of mixed earnings reports, surprising company announcements, and continued uncertainty to the economic outlook for 2008, the major averages have shown some steadying signs in the last 2 weeks.
Using the Russell2000 index as our benchmark for market performance, we have recently found a higher low point, and a lower
However, despite this faint glimpse of hope for investors, it does not signal a return of buyers just yet.
The medium-term trend still remains down, and until we have further sideways consolidation, or an upwards break, investors should not be jumping into the markets just yet. A consolidation could easily still be proceeded by a continuation of the previous trend. In fact, in light of the recent market news and headlines, there is still a stronger probability that sellers will prevail.
For now, a market consolidation gives investors and analysts the opportunity to take stock of their portfolio’s and where the markets may shift next. It is an opportunity for investors to accumulate stock at lower prices, but the “fear” factor surrounding the economy may find a lack of accumulation for now.
Major activity through the last week ….
Monday:
- Changes to the DOW Jones Industrial Average: BAC and CVX added, while HON and MO removed
Tuesday:
- Warren Buffett offered $800 billion package to MBI, ABK and FGIC Corp for bailout
- Government releases “Project Lifeline” to 6 major mortgage lenders, to help avoid foreclosures
- GM reports $1.5 billion adjusted loss
Wednesday:
- Retail Sales increase 0.3%, better than expected -0.3%
- Positive earnings reports help lift markets
Thursday:
- Return of sellers
- Bernanke speaks to Senate Banking Committee, alluding to possibility that US is nearing a Recession.
- FGIC Corp loses AAA rating
Friday:
- Follow-up selling after Bernanke speech.
The week ahead ….
After a quiet week for economic announcements, and a month of focus on earnings reports, investors are likely to drag their attention to key economic reports this week in a hope of gaining some insight into the state of the economy.
With Monday a public holiday, it will be a shortened week that is likely to have major impact. Especially in the middle of the week.
On Wednesday, before market open, the release of Building Permits and Housing Permits data will set the tone for the Housing Market. Recent data has shown a continued slowing to this sector, which will prove continued fears for the Housing, Construction and Mortgage Lending sectors.
Also before market open on Wednesday, CPI data will be released. The Consumer Price Index is one of the key pieces of data that the Fed Reserve uses to measure the state of the economy. CPI is a typical measurement of Inflation, which has been running at the higher end of the target range for a few years.
The Fed has been lowering rates to help boost the economy, however, if CPI shows that inflation is still running high, there could be concerns for what action the Fed may take in coming months.
Later in the day on Wednesday, the FOMC (Federal Open Market Committee) will be releasing their minutes from the Jan 30th meeting. Although analysts have already received the outcome of that meeting (where there was a lowering of Interest Rates), they will scrutinize these notes for any insight into the Fed’s outlook for the economy.
Market Outlook ….
Neither bulls nor bears were completely dominant in the last week. We have a consolidation occurring on the major averages as investors try to take stock of what future activity may occur.
With more and more talk that the
For the time being, any buying activity experienced in recent weeks has not shown sufficient depth to suggest buyers are likely to return on the medium-term. This can only lead us to continue maintaining a medium-term Bearish outlook for now. Volume levels have not confirmed buyer accumulation has been strong enough to warrant a change in trend just yet.
Do not be surprised to see a short-term market rally. However, monitor any such movement carefully, and with the first sign of selling pressure expect further downward market direction.
The worst case scenario is that the markets continue to consolidate. Short-term traders will be triggered into new directional positions, and quickly whipped out as the markets fail to trend. For the long-term investor, this is also not a good scenario as it still leaves the markets open for the potential to continue trending downwards.
Strategy Analysis ….
With markets consolidating at the moment, we need to be patient for clear signals of a directional movement. Either upwards, or downwards.
Traders: short-term stock, CFD, or directional option traders should remain on the sidelines for now and monitor for a clear confirmation of market direction. However, option traders may like to adopt the Straddle strategy during these market conditions. The Straddle strategy will allow the trader to benefit from whatever directional movement transpires in the coming weeks, whilst closing the side of the trade that is not benefiting from the market shift.
Option Writers: with February option expiration this weekend, writers will be looking for new positions to enter on market open Tuesday. Due to the non-directional aspect of the markets in the last 2 weeks, it is difficult to confirm whether the option writer should adopt Covered Call or Covered Put positions. For this reason, we suggest conservative positions in both strategies. That is, enter into ITM (In The Money) Covered Call and Covered Put positions. Choose industries wisely (for example: Finance for Covered Put), and we also suggest lowered capital exposure until a market direction presents itself. Current conditions are too risky for Naked strategies.
Investors: now could be a good time to accumulate stock. However, there is still high risk that the markets could continue to retrace, therefore, only enter positions you are willing to hold for the long-term. To decrease the risk of your position/s, we suggest adopting Protection strategies such as purchasing medium/long-term puts against the stock position, or medium/long-term index put options against your portfolio. This should offset any continued market retracement on the position/s. However, if the markets find further stability, or rally, you will still benefit from capital gain.
