US Market Commentary – week ending 7th March 2008
Sellers gripped the markets in the final half of the last week, breaking through support levels and confirming the negative sentiment held by investors over the last 6-months. Economic data weighed heavily, as did the “subprime” fallout. While the outlook for earnings through 2008 is showing clearer signs of slowing.
The major averages have retraced back to January’s lows, reiterating the fact that the current economic conditions are far from having settled. Mild buyer activity in late January saw the S&P500 and Russell2000 indexes rallying in a counter-trend movement. But true to the downwards trend that has been in play over the last 6-months, further selling has persisted in the last 3-weeks.
Another lower
Since its peak in early October last year, the S&P500 index has retraced nearly 17%. For the broader Russell2000 index, which represents the broader market, it has retraced nearly 23%. This has literally wiped trillions of dollars from the markets, and is likely to begin worrying even the most confident of long-term investors.
Sentiment is entrenched with fear ….
What the activity in the last week has proven, is that investors are well and truly on the side of Bearish. Where there had been some hope that the markets might consolidate and eventually find buyers again, the bearish reversal that has formed in recent weeks confirms that a downwards trend is in play.
Panic selling drove the markets in the last few days of this week. It is much the same story as we have seen over the last 6-months, with reports suggesting the impact of the Subprime credit crisis is likely to produce further write-downs in the Finance industry.
Solid red candles on the major averages clearly represent depth to sellers. There has also been strong volume behind this sell-off, representing depth to the number of sellers offloading shares.
But the negative sentiment is not just focussed on the Finance sector. We are now beginning to find its affect flowing into other industries. Leading IT company INTC has lowered its earnings forecast.
Economic impact ….
A number of economic reports weighed heavy in the last week. Construction Spending decreased heavily, while Factory Orders were also much lower than expected. Investors found little solace in the release of the FOMC’s (Federal Open Market Committee’s) Beige Book on Wednesday, leaving most of the focus for Friday’s Unemployment data.
And investors were very disappointed.
Investors had been expected weak numbers, however, the biggest decline since March 2003 in the non-farm payrolls cause investors to sell heavily. At the same time, January and December figures were adjusted downwards.
Higher Unemployment is a negative aspect for the economy. It means there is less production on a manufacturing level, less spending as more people tighten their spending, and more strain on government services.
At the same time, however, there are fears that Inflation is not yet reflecting the conditions that demonstrate a weakening economy. CPI data is scheduled for release in the coming week, and investors will sitting on the edge of their seats.
On Monday, Wholesale Inventories will be released shortly after market open, while the economic Trade Balance is scheduled for release before market open on Tuesday. Wednesday is also a relatively quiet day with the Treasury Budget to be released at 2pm.
Thursday is likely to give investors something to think about. Before market open will be the release of Import/Export prices and Retail Sales figures. Business Inventories will be released shortly after the opening bell at 10am.
As previously mentioned, however, investors will be holding on until Friday for the release of the CPI figures. It will be announced before market open, and is likely to provide a big catalyst for direction.
Market Outlook ….
Last week, we had warned investors to watch out. This week, it is hard to expect nothing else but for further selling pressure to persist.
There is the slight potential that following such a large drop in such a short period, that investors might see this as a buying opportunity. The major averages are now trading at long-term lows, and if we were to ever find buyers, now is the time.
However, as we had discussed above, the market sentiment is driven by sellers at the moment. Not only is there negativity in the Finance sector, but the Housing sector continues to show further losses and now there is a broader sense that the economy is slowing dramatically.
There are some other frightening factors to consider as well. Crude Oil is now trading at a new all time high. It has crept above $105 a barrel in recent weeks, and that means a higher cost of production for goods and services. Not only will consumers feel the pinch when filling up their vehicles, but we should expect these costs to be presented in all other goods and services as well.
At the same time, the price of Gold has sky-rocketed to just short of $1,000 an ounce! Only in August last year it had been trading around $675. This phenomenal growth reflects a “flight to safety” for investors, who would prefer to hold onto an investment that can be used in times of poor economic activity.
With all of the above in mind, investors and traders alike should have the sense of mind to maintain a Bearish opinion. Remember the oldest, and truest of analytical sayings: “The trend is your friend”.
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: Maintain exposure on Covered Put positions only. There are 2 weeks left until expiration of the March contracts. 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.
