US Market Commentary – week ending 14th March 2008
For most of the week, buyers made their presence felt as hopes influenced the Financial sector towards an end to negative news. But alas, sellers have not seen the end to their authority and the markets slid into the negative by weeks end.
Investors had been eagerly awaiting the CPI (Consumer Price Data) scheduled for release on Friday, but had not anticipated a shock announcement from Financial market leader BSC.
As had been seen for many large financial companies over the last 6-months, BSC was reported to have greater losses to the subprime credit crunch than was first anticipated. Shortly after market open on Friday, BSC announced that they were receiving financing from rival JPM and the Federal Reserve.
So yet again we have seen another major Financial institution being bailed out of its credit debt!
The week had started on a bearish note, due to the negativity surrounded the Financial sector, and finished in much the same way. However, through the middle of the week, there was reasonable buying influence that almost gave the Bulls enough hope that an “end was nigh!”
Initially, on Tuesday, buyers had returned to the markets on news that the Federal Reserve is implementing a new scheme known as the Term Securities Lending Facility (TSFL), where they will lend up to $200 billion of Treasury securities for a term of 28 days, instead of just overnight. The scheme will begin as of March 27th.
Positive talk on the street of a potential further lowering in Interest Rates fuelled the bullish activity, especially ahead of CPI data scheduled for Friday. There was sufficient buyer demand to warrant talk that a market bottom may have finally been reached, but as Friday’s activity proves, a bottom is yet to be found.
A short week, Option Expiration and plenty of economic news ….
Due to the Easter long weekend this coming weekend, we have a shortened week of trading due to market closure on Friday. At the same time, Options Expiration will see plenty of activity as investors re-position trades.
Of even greater influence, however, is the number of economic reports scheduled for release early in the week. In particular, the FOMC monetary policy statement (to be released at 2.15pm on Tuesday).
The FOMC (Federal Open Market Committee) monetary policy statement is the announcement on whether or not Interest Rates will be changed. Currently, majority of analysts are expecting a lowering of rates. Especially as there are even greater fears following Friday’s market hammering.
A lowering of Interest Rates is likely to see the markets rally, because this is exactly what investors are wanting at this stage. If rates remain unchanged, however, don’t expect too much positive activity. Investors are likely to be quite disappointed and this could lead to a market sell-off.
Prior to this, however, the release of Building Permits, Housing Starts and PPI (Primary Producer Index) data before market open on Tuesday is likely to also have an influence on investor confidence.
Investors had been positive over the CPI data released last Friday, but this was negated by the negative BSC news. However, with CPI data increasing slightly, we do not see this as a positive signal for Bullish activity.
Rising CPI reflects continued pressures on Inflation, at a time when the FOMC is lowering Interest Rates to help instigate economic activity. Typically if CPI is rising, the Fed will increase rates to help slow down spending, and save the economy from rising too quickly.
With conflicting activity occurring between data and the Fed’s actions, there is great concern over the health of the
Market Outlook ….
Sentiment has failed to change over the last week, despite some positive news from the Fed Reserve. Investors attempted to find some comfort in stocks that have been heavily oversold, but relinquished those thoughts on a key piece of negative market news.
For this reason, it is difficult to think that the markets wouldn’t continue on a Bear slide!
Currently, we have a medium-term downward trend, a short-term downward trend, and the major averages attempting to break into new long-term low levels. All of this suggests continued downward activity.
However, although investor confidence might be shot to pieces, lower Interest Rates would be deemed a positive for buyer accumulation. Especially if that is supported by a positive statement from the FOMC. For this reason, it would be no surprise to see the markets rallying mid-week.
Because the markets have retraced significantly over the last few months, investors will be looking for opportunities to accumulate stock. Ideally, if we find a short-term rally occurring, investors/traders should be watching this movement for any signs of buyer weakness, using bearish reversal signals as an opportunity to enter into new trades.
Strategy Analysis ….
Traders: The medium and short-term trends are bearish. Trade with the trend, and use any short-term rally’s as an opportunity to enter into Bearish reversals.
Option Writers: Evaluate March positions for potential to be Exercised as there is only 1 week until expiration. Adopt exit strategies for those positions you do not wish to be Assigned on. Maintain exposure on Covered Put positions only. Do not consider Covered Call or Naked Put positions.
Investors: Monitor the markets for consolidation. This may provide opportunity for “averaging” current positions. Do not consider entry into new positions for now. Protection strategies could be considered, however, the price of protection will be very high at the moment.
