US Market Commentary – week ending 28th March 2008
A positive start from buyers early in the week failed to result in a positive week overall. Sellers returned to the markets mid-week on continued fears over the Finance sector. Signs that a slowing economy are beginning to reach other sectors is also weighing heavily on investors.
In typical downwards trend activity, a lower
By Wednesday, sellers had returned and set the tone for the remainder of the week. This formed a lower high point and threatens to form a continuation of the medium-term downwards trend.
Should sellers continue to drag the markets down in the coming weeks, investors/traders should be looking for potential support at approx 1,270. Two low points through mid-March held support at this level, which also coincides with the low levels of late January. This retracement represents an 18% retracement in market value from the October highs, reflecting a serious level that may be considered “oversold”.
On the short-term, this means the markets have potential to retrace another 3.5% from the current levels. This may not seem like much when compared against the market activity from the last 6-months, but it is significant when the market sentiment is considered.
Will Buyers show their true colours ….
In the last 2 weeks, there has been a great deal of buyer accumulation as investors have considered that the Finance sector is too Oversold. This sector has fallen more than 35% since mid last year, and investors are now starting to think that the “worst is over”.
This sentiment helped the markets consolidate through February, and again through March, along with some short-term market rallies. The retracement of the markets through the last week is a warning sign to those who are too eager to see the markets rally.
Buyers are going to need far more conviction than what we have seen thus far. Despite some positive news of late, the fact remains that not all is well in the Finance sector. However, should we find a return of buyers in the coming weeks, forming a higher low point, there may be some hope for a change in trend.
Economic uncertainty ….
On Monday, the markets had started the week with a bang. February Existing Home Sales figures were released, and investors liked what they were presented with. For the 1st time in a year, this report showed a rise. However, the median home price was down 8% from the same period a year before.
Investors were also given another reason to buy stocks as the buyout offer for BSC increased from $2 per share to approximately $10 per share. At the same time, the Fed Housing Finance Board gave assistance to Home Loan Banks, boosting the Finance sector significantly.
But by Tuesday, the buyer sentiment was beginning to wain. Consumer Confidence figures were down heavily, which was expected. This caused a stalling in the markets with mixed results across the board.
Finance went from hero to villain on Wednesday as research firm Oppenheimer & Co downgraded a number of finance company’s’ first quarter earnings estimates. Deutsche Bank (DB) reported that they won’t meet their 2008 profit target, while the private equity deal for CCU was reported to most likely fall apart. The Durable Orders report came in weaker than expected, down 2.6% before investors were hit hard with Feb New Home Sales decreasing 1.8%.
Treasury Secretary Paulson suggested to the US Chamber of Commerce that “
Negativity continued on Thursday as ORCL reported earnings, with the stock price falling 7.2% on weaker revenue figures. Fourth quarter GDP (final) figures remained unchanged at 0.6%, with Consumption revised higher to 2.3% from 1.9%. This means better than expected spending and lower than expected inflation – a positive for the economy.
The week was rounded out with further worries extending into the Retail sector. JCP issued downward guidance for their 1st quarter earnings results. Subsequently, Retail stocks fell heavily.
Personal Income figures rose while Personal Spending figures were at expectations. Core PCE also med expectations, however, there was a big sell-off in Commodities.
All in all, it was a week where the Bulls failed to receive the confirmation they needed to help launch a change in trend. There still remains a heavier weighting of negativity for the Bears to remain in control, and as we have seen, the markets have followed suite.
Unemployment in the spotlight ….
It will be another week of careful activity as investors continue to watch the economic data for clarity on the strength of the economy.
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· Auto & Truck Sales – from 1st April.
· Construction Spending – Tuesday, 10am.
· ISM Index – Tuesday, 10am.
· Unemployment data – Friday, 8.30am. A key economic indicator that could change direction of the markets.
With a very quiet week of economic reporting through the middle of the week, there is potential the markets may find some relief buying yet again. This will depend on what announcements are made to the markets, as any negative reports in Finance is likely to strengthen the position of sellers.
Market Outlook ….
The S&P500 index is trading midway between the short-term support and resistance. A return of buyers would result in a higher low point, and might produce the launching pad for a potential change in trend.
However, with Unemployment data looming at the end of the week, it is hard to expect strong buying activity through the week. Investors are likely to be quite nervous after having seen sellers return on poor economic data last week.
Activity in commodities is also likely to play a major factor. Crude oil has wavered between $110 and $100 a barrel in the last 2 weeks, but seems to be holding above the big round number (100).
The Retail sector will find March sales figures released over the coming two weeks, and after the report from JCP in the last week, we could find that the economic slowdown is beginning to affect other industries outside of Finance. If we find this type of activity occurring, investors are likely to panic sell yet again.
Should the markets retrace back to their mid-March lows, we will need to confirm whether that support holds or is broken. Ideally, investors will be looking for that support to hold and potentially form a larger consolidation pattern for a launching board of a new bullish trend in the future.
It is a very testing time right now, as we are likely to see further negativity in economic data, and there is no doubt that we are going to receive more surprises from Finance, and potentially Retail.
Do not be too eager to “turn Bullish” just yet. Caution must remain predominant with any market outlook with a greater weighting for further bearish activity on the short-term.
Strategy Analysis ….
Traders: There may be some short-term bearish potential, but with support only 3.5% below current activity (on the S&P500 index), there may be limited potential. Trading a consolidation pattern while the markets are midway between support and resistance is extremely difficult. Therefore, traders may like to monitor and hold on the short-term.
Option Writers: Maintain Bearish option writing positions (Covered Puts) for the time being. We have not yet received signal that the Bear trend is over.
Investors: This may still be a consolidation at the bottom of the markets, but be aware, we may find there are more “bottoms to the markets” yet to come. This period could be used as a time to accumulate stock, but only if the investor is adopting protection strategies at the same time.
