US Market Commentary – week ending 8th February 2008
Buyers relinquish their short-term rally as the markets found renewed incentive to sell stocks. There were few economic reports scheduled for release, however, what hit the news wires were negative for economic growth. Earnings season is mostly over, and Crude Oil holds medium-term support.
Investors are watching these markets like hawks. Anyone with vested interest in the markets is scrutinizing as much data as possible in an attempt to gain insight into whether or not the
So in a week where there were very few economic reports scheduled for release, what were investors basing their decisions on? The answer is good old fashioned sentiment.
The week that was ….
Monday:
- Financials drag market down
- GOOG falls on concerns over the MSFT aggressive bid for YHOO
- Factory Orders decline 2.3%. This suggests there isn’t a recession in manufacturing
Tuesday:
- Market sentiment sells on recessionary fears
- January ISM (Institute for Supply Management) Services Report released earlier than expected. Business activity fell to 41.9% from 54.4% in December. Below 50 reflects a retraction in the economy. This is the first retraction in nearly 5 years.
Wednesday:
- DIS earnings were positive
- BHP increases takeover bid for rival RTP (RIO.AX)
Thursday:
- January Retail same store sales mixed, with WMT down.
- PEP earnings positive
- December Pending Home Sales fell 1.5% compared to an expected 1.0% fall. This is lower than the November 3% fall however.
- Bank of England (BOE) cuts interest rates ¼% to 5.25%
- European Central Bank (ECB) keeps rates steady at 4%
Friday:
- Technology sector rallies, with AMZN announcing a $1 billion share repurchase.
- OPEC (Organization of Petroleum Exporting Countries), announces a cut to output to prevent crude oil prices falling further.
- The US Senate votes for economic stimulus package of $167 billion.
- December wholesale inventories increased 1.1%. Which is greater than the 0.3% that was expected.
Downtrends persist ….
Analysis of the major averages shows that with sellers re-entering the markets again in the last week, that a general downwards trend still exists.
Following the mild buyer rally a few weeks ago, there has been no real substance behind the short-term rally that many had hoped was the end of the “market correction”. However, strong selling pressure, based mostly on investor fears, soon confirmed the next leg of the greater downwards trend.
On the Russell2000 index, which FMR Analysts uses as our benchmark for market performance, a lower
Seller momentum slowed towards the end of the week, as denoted by the weak candlesticks for Wednesday, Thursday and Friday. In particular, Thursdays small open red candle and Fridays small solid green candle.
There are two trains of thought for where the markets may move based on this activity. Firstly, sellers were taking a pause ahead of further downwards activity to maintain the greater trend. Or secondly, weakness in sellers denotes a potential return of buyers which would form a higher low point and possibly some stability in the markets for the medium-term.
Switching the view to a weekly chart on the same data suggests the prior expectation has a stronger probability. Weekly data shows a Dark Cloud Cover candlestick pattern forming after a two week rally. Thus, there is a stronger potential that sellers could persist in the coming weeks.
Based on the recent lows that had formed in mid-January, there is potential that this market could fall another 7% towards the recent lows of 650 points, if not further. Should the markets continue to retrace to these levels, this would denote a 24% market decline since the highs mid last year.
Earnings season drawing to an end ….
As earnings season draws to an end, investors will re-focus their ‘concerns’ towards scheduled announcements such as economic reports, and the normal major influences such as Crude Oil. However, although there are a number of reports that might cause investors to think further on the economic outlook, there are no key economic reports scheduled this week.
On Tuesday, the Treasury Budget will be announced, but this has little impact on general market activity (normally). Retail Sales are scheduled for release before market open on Wednesday, and could cause some volatility. Friday is the busiest day for reports, with Export/Import prices, Capacity Utilization and Industrial Production figures all scheduled for release before market open.
Crude Oil has rallied from medium-term support at the end of the week, signifying the potential for prices to continue rising. At the beginning of the year, we had seen this commodity trading at $100 a barrel, before slipping to support around $86.
Following an announcement from OPEC (the Organization of Petroleum Exporting Countries) on Friday, this governing body will decrease the output capacity in an attempt to prevent prices falling below $80 a barrel.
Prices were also marred by cut pipelines in
Market Outlook ….
Based on trend and sentimental analysis, there is a high probability the markets may continue to retrace. A strong reversal, like the one we have seen this last week, are a signal that the previous buyer efforts were merely speculative, and have little depth behind the movement.
There have been numerous downgrades to stocks in the Financial sector this last week, and Technology (which had been one of the only major positives for investors), has given up 4.5% in the last week alone.
Investors may have found some mild relief through the second half of January, but have little hope of further recovery based on the activity we have seen this week.
Strategy Analysis ….
The signal from the weekly charts, on the major averages, is for traders and investors to be adopting Bearish strategies.
Traders: Bearish positions could be entered at this point in time. Choose positions wisely. Be aware of stocks that are already oversold, as these may have less profit potential. Especially if the markets rally on some unforeseen positive news.
Option Writers: US Options expiry occurs at the end of this coming week. Ensure you evaluate your positions heading into the end of the week, making sure you take action on positions where you do not want to be exercised. You should only be considering Covered Put positions at this stage. In particular, In The Money (ITM) Covered Puts. Building market negativity suggests it is still a dangerous market for adopting Covered Calls and Naked Put positions.
Investors: Our suggestion to downsize protection strategies may have been a little premature. A return of sellers suggests the long-term investor should be entering/adjusting their protection strategies for their portfolios. Enter into new Put option positions for protection where necessary. Some may accumulate stock at these lower prices, but do not hesitate to exit the position if there is reasonable potential that it will continue to retrace on the short/medium-term.
