US Market Commentary – week ending 1st February 2008
The FOMC lowers rates another half percent. Market Sentiment is showing signs of changing, but is this really a return of buyers, or “bottom fishing?”
Investors had been hanging on the edge of their seats in recent weeks. Plummeting markets globally incited fear into even the more experienced of traders and investors. Panic selling saw profit taking across the board and had news reports touting the big R word: Recession.
But market sentiment has changed in the last week, offering light to those investors who have hung onto their portfolios. Buyer demand has increased, especially in troubled sectors such as Financials and Housing.
Is this truly the end to the market downturn? Is now the time to be accumulating stock and profiting from the next upward shift?
Mixed economic reports …
Focus was completely towards the FOMC monetary policy announcement on Wednesday, where Interest Rates were lowered a further 50 basis points to 3.5%. This follows a 75 basis point lowering only a week and a half earlier. The lowering of interest rates gives business and home owners a little extra cash in their pockets, allowing greater freedom to spend within the economy.
However, there have still been numerous economic reports showing how the economy is slowing. On Monday, New Home Sales figures showed a 40.7% fall from the previous years figures. The median new home sale price has fall 10.9% for the same period.
Consumer Confidence figures were released Tuesday, showing weakness, while GDP figures on Wednesday also represent a slowing economy having only gained 0.6% for the month. Topping off the week was an increase in Initial Claims for unemployment on Thursday.
Certainly, the massive 1.25% decrease in interest rates over the last 2 weeks will help stimulate the economy. It is not likely to take effect in the next month, however, by March we should begin experiencing the stimulus of these actions through economic data.
FMR Analysts believes this unprecedented action is a clear reflection of how the Fed Reserve is concerned that the economy is slipping into Recession – if it hasn’t already!
There is no doubt that the economic data from the last 6-months has shown a slowing economy. We are still experiencing this now (as mentioned above). And despite a recovery in Financial stocks in the last two weeks, the massive bail-out leading Financial companies have experienced cannot represent a strong sector.
Selling off your debt (which is exactly what these financial firms have done), only puts a bandaid over the wound. The debt is still there. It must be repaid, and if the economy continues to slow, it will only be harder to pay back.
It is a relatively quiet week for economic announcements, and therefore, we are not expecting too much negativity to influence the markets. On Monday, Factory Orders will be released at 10am, while Pending Home Sales figures are scheduled for the same time on Thursday. Along with Wholesale Inventories for December on Friday at 10am, these are the more important economic reports scheduled for release this coming week.
Are there signs of Stagflation on the horizon? …
The definition of Stagflation is: “a period of inflation combined with stagnation (that is, slow economic growth and rising unemployment, possibly including recession) – see Stagflation definition.
Recent data has shown an increase in unemployment and that the economy is slowing. The economy had fallen approximately 20% from its highs mid last year to the recent lows, which by any account, should deem a Recessionary movement. Therefore, there are signs that we are in a period of “Stagnation”.
The question remains whether Inflation is continuing to rise. It has slowed over the last 6-months, but with such a massive decrease in Interest Rates, will consumers instigate a push in spending that will maintain Inflation above the Fed’s target range? For now, FMR Analysts thinks yes!
Readers should keep this terminology, stagflation, in the backs of their minds over coming months. We expect more articles to come out during that period as journalists and analysts start using it more frequently. Till now, there have been only a few reports explaining this situation, and only once in history where the economy has suffered from its affects – the only period of stagflation was in the 1970’s.
Earnings results generally impress, though there are still signs of problems …
With 20% of the S&P500 companies reporting earnings results in the last week, there was a lot of data for analysts and investors to digest. Majority of it was better than most had expected, however, there were concerns from some key companies.
Technology leaders GOOG and YHOO both missed their expected returns, causing the stock prices to fall heavily. This did little to influence a negative spin on the NASDAQ index, however, which continued to maintain a mild recovery through to the end of the week.
Blue Chip companies such as BA and BMY also missed expectations, but they too followed general market sentiment and rallied through to the end of the week. It would seem that bottom fishing and positive sentiment was the prevailing factor following the lowering of interest rates this week.
| Monday | |
| APC | After Market Close |
| NWS | 4:00pm ET |
| Tuesday | |
| BHP | 4:30pm ET |
| BP | 02:00am ET |
| DUK | Time not Supplied |
| NBR | After Market Close |
| TM | 01:00am ET |
| TYC | Before Market Open |
| DIS | After Market Close |
| Wednesday | |
| AMX | Time not Supplied |
| CSCO | Time not Supplied |
| DVN | Before Market Open |
| TWX | Before Market Open |
| Thursday | |
| APA | Before Market Open |
| AN | Before Market Open |
| CTSH | After Market Close |
| MCO | Before Market Open |
| PEP | Before Market Open |
| UN | 02:00am ET |
| Friday | |
| Nil | |
Energy stocks, in particular Oil companies, will be the major focus this week. Crude Oil prices have bottomed out above $86 a barrel in the last 4-months, having peaked at $100 at the beginning of the year.
We may be experiencing a pullback in the commodity, which could find oil producers lowering their outlook for the coming months. Because this sector has been a “steadying” factor during the recent Financial sector crisis, if earnings results and outlooks for the coming year are poor, investors may look to exit positions. Therefore, a major influence in driving the markets down.
Analysts outlook ….
Buyer sentiment has entered the markets, and if there is enough confidence behind the lowering of interest rates and the governments $160billion stimulus package, investors could very well continue to push the markets up over the coming week or two.
The greatest concern in the coming week are the earnings results coming from the Energy sector. As we had mentioned, if there is a slowing of growth and a poor outlook from these companies, this could have a strong negative impact on economic growth.
For now, there is a reasonable potential that buyers will remain influential through the week. The announcement that MSFT is proposing an acquisition of YHOO will only help fuel investors grab for stocks at a cheap price.
Technically, there is no certainty that the markets will have the depth to maintain a strong recovery, so we need to be patient. The current short-term rally is classified as a “counter-trend” movement, that is, a rally against the established downwards trend. Therefore, it may take a few weeks before a change in trend technically occurs.
Strategy Analysis ….
Despite the weakness from investors late on Wednesday afternoon, following the Fed interest rate drop, sellers failed to capitalize on poor data this week. As we have mentioned, this has led to a change in sentiment, suggesting the short-term rally may persist for the next week or two.
Traders: continue to monitor for a strong Bearish reversal in the markets. If this occurs, expect panic selling and therefore, enter into Bearish trades. The speculative trader may look for some short-term Bullish trades, but be aware, this does hold greater risk. Quick profits, quick trades.
Investors: for those investors who had entered into Protection strategies October/November last year (when FMR had first suggested), you should find those put positions now in strong profits. You could take profits from these positions, downsizing your Risk protection due to the potential that the markets may rally on the short-term. If the markets show signs of further retracement in weeks to come, new protection positions can be re-entered. Some investors may see this time as an opportunity to accumulate stocks at lower prices. If so, choose those stocks wisely. Finance, Construction and Insurance stocks are still too dangerous to consider.
Option Writers: If ITM (In The Money) Covered Puts had been entered in the last 2 months, you may find the current rally testing your exit levels. Monitor these carefully, and don’t be afraid to exit if need be. The market outlook is still too risky to consider entering Covered Calls or Naked Put positions. Only aggressive investors would consider these high risk strategies at this point in time.