FMRAnalysts

US Market Commentary – week ending 4th April 2008

2008-04-06T17:39:00.003+10:00

The jury is still out as to whether or not the US is already in, or heading into, a Recession. Economy data continues to produce bad numbers, along with negative reports for the Finance sector. But despite this, investors’ reactions give hope that a market bottom may be forming.

Nearly all of the activity for the week occurred on Tuesday. Monday’s markets were able to break a 3-day negative run, but Tuesday’s activity was a strong push from buyers who were accumulating stocks heavily. Activity for the remainder of the week was non-directional, however, despite impacting reports and announcements.

The catalyst for Tuesday’s rally hinged on the finance sector (again). UBS reported that they were expecting $19 billion of write-down for the 1^st quarter, with a loss of $12 billion. Shortly thereafter, DB also reported expectations of a $3.9 billion write-down.

Investors were keen to buy up finance stocks, despite the fact that this really is negative news. The sentiment behind the buying activity: that although this is negative news, that is “should” be a sign that there will be no more write-downs for these companies.

That’s a pretty weak excuse!

Tuesday’s activity did follow an announcement on Monday from Treasure Secretary Paulson who announced a plan to “overhaul” the US financial regulatory system. This might be another great gesture to inspire buying activity, but for any action to come from this will take many months, if not years. Therefore, don’t expect any real influence on the finance sector any time soon.

With the markets hovering sideways for the second half of the week, one might think there wasn’t much news activity. However, there was plenty.

On Wednesday, Federal Reserve Chairman Ben Bernanke addressed the Joint Economic Committee, stating “real GDP will not grow much, and might contract”. Investors weren’t too happy with this statement, but then again, this isn’t anything new to anyone. Clearly the impact of the finance sector, housing credit crunch and slowing economy are going to have an affect on leading economic indicators.

Majority of investors spent the second half of the week waiting for the March Unemployment figures. As we have been expecting, in light of the poor economic balance, Unemployment gained in March. It rose from 4.8% to 5.1% and has some analysts suggesting that this may actually be a sign of a Recession.

There are many articles circulating at the moment that are comparing this latest unemployment report with the figures at the end of the last Bear market (early 2003). Higher Unemployment puts pressure on an economy, especially at a time when there is high credit risk amongst consumers. With more people out of work, with companies struggling to meet profit expectations, and a finance sector in dire troubles, we could find that Unemployment only increases over the next couple of months. To read more about the impact Unemployment may have on the current markets, CLICK HERE for an article from Economist.com

Mixed Technical signals ….

A stagnant market over the last 3 trading days could be a sign of a short-term high forming.

The S&P500 index has rallied to 1,370 over the last 3-weeks, after reaching a bottom around 1,270 – a gain of 7.8%. Since then, we have seen a short-term higher low point and higher high point, which could be signs that there is strengthening buyers.

However, the medium-term trend is not yet broken. And that leaves traders with a sense of uncertainty. The markets could swing in either direction right now, and no-one would be surprised by the move. Strong buyers on Tuesday have failed to find follow through activity, yet we haven’t seen the selling pressure that would otherwise denote weakness from those buyers.

The current market activity is trading just below the previous lower high point established at the end of Feb. That point was also slightly lower than the prior lower high point in early Feb. Technically, the medium-term trend should still be downwards, but it does appear it is shaping up to form a sideways consolidation.

Should the S&P500 index break below 1,330, it is likely that the market could retrace further back to the long-term lows of 1,270. However, continued buyer activity or the forming of another higher low point is a strong signal that markets could be attempting to change trend.

A quiet economic week ahead ….

Investors will be given a break in the coming week, with few economic reports scheduled for release. However, there are still a couple of announcements that must be monitored carefully.

Tuesday will be the day to watch with Pending Home Sales figures scheduled for release shortly after market open, and later in the day, the FOMC (Federal Open Market Committee) Minutes from their March meeting.

Both are key in the current economic climate due to the volatile aspect of investor reactions. Expect negative numbers on Pending Home Sales as this sector has failed to produce enough of a increase in sales to warrant a change. And there shouldn’t be anything surprising in the FOMC Minutes as most of the information has already been reported.

Investors will be looking for a hint from the FOMC that interest rates will be lowered at the next meeting in April. So any wording towards this will be viewed as a positive and could lift the markets.

Earnings season begins on Monday ….

Investors beware! Earnings season is upon us yet again, but this time it is likely to have a major impact on market confidence.

Earnings season officially begins with AA reporting after market close on Monday. We have already seen a large number of earnings estimates cut for the finance sector, but it will be the impact on the broader market that analysts will be watching carefully.

We will list those companies we believe could have a major impact on market behaviour, and update on those that have influenced the markets.

Monday
AA	Time not supplied

Tuesday
Nil

Wednesday
BBBY	Time not supplied
CC	Time not supplied

Thursday
Nil

Friday
GE	Before Market Open

The first week of the season is typically quiet. Reporting activity will increase substantially in the following weeks.

Option Volatility decreasing ….

For market investors, some positive analysis is beginning to creep back into the fold. The CBOE Options Volatility index has decreased over recent weeks, suggesting there is “less fear” in the markets at present.

The VIX index is referred to as the “Investor Fear Gauge”, and when it is trading high, the markets are typically falling.

Pressure has eased, but not sufficiently to negate all risk assessment. There is still a reasonable potential that selling pressure would be invigorated on even 1 poor announcement from a key company. For this reason, remain very cautious.

Market Outlook ….

It is surprising that sellers did not react more predominantly on the Unemployment data, or on finance announcements earlier in the week. It may be that sellers are literally exhausted at the moment, and that buyers see this as too much of an opportunity to accumulate stock at good prices.

Or, will it be a delayed affect?

Technically, and fundamentally, there is good cause for us to find sellers into the next week. A hovering market will not remain long, and we have experienced 3 trading days with no market direction into the end of the last week. This activity is similar to the previous lower high point that had formed in late February, so we need to monitor for signs of sellers breaking the current short-term rally.

The greatest concern for any investor evaluating current conditions is the volume. To break the negative mould and give buyers a solid opportunity to drive upwards, we need to see a strong increase in average volume. Especially on those days where buyers are dominant.

At the moment, however, volume levels are average (at best), and do not reflect the change that is required to break the trend. To compare, the amount of selling activity that occurred in late January when the markets fell heavily is almost a third greater than the current numbers.

Be cautious with any upwards continuation. It is safer to remain on the sidelines, than to be caught buying stock into a false upwards shift.

Strategy Analysis ….

Traders: Confirmation of a Bearish reversal pattern on the daily chart of the S&P500 index should signal entry into Bearish trades. We suggest looking at the weaker sectors such as Construction and Finance.

Option Writers: There are 2 weeks left until options expiration of the April contracts. Maintain portfolios for now, in preparation of evaluation next week ahead of expiration. Writers should have their portfolios weighted to Covered Puts at the moment, with very conservative exposure to Covered Calls, and no exposure to Naked Puts.

Investors: Weakness in the second half of the last week suggests a lack of buyer strength to change market trend. Therefore, monitor the short-term activity for any pullbacks, using this as an opportunity to accumulate stock.

US Market Commentary – week ending 28th March 2008

2008-03-30T20:46:00.001+10:00

By Matthew Brown

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 high point has formed in the last week, denoting a continuation of the trend. Following the Easter long weekend, investors returned to lift the markets on Monday, but as seen on the above chart for the S&P500 index, they gave up by mid-week.

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 1^st 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 “Wall St investment firms should be subjected to increased regulation, if they are to borrow from the Fed.” This helped send the markets into a tailspin.

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 1^st 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.

· Chicago PMI – Monday, 9.45am. Expect weaker figures to pull the market down.

· Auto & Truck Sales – from 1^st 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.

US Market Commentary – week ending 20th March 2008

2008-03-24T18:02:00.002+10:00

By Matthew Brown

Volatile market activity had investors on the edge of their seats in a shortened trading week. A surprise lowering of the Discount Rate used by Financial institutions preceded a drop in Interest Rates by the FOMC, while Financial stocks may finally be finding a bottom.

Last weekend, investors were surprised by a couple of announcements. Firstly, one of the larger Financial firms – Bear Stearns (BSC) announced that they were being sold to JPM for a measly $2 per share. Secondly, the Federal Reserve announced a lowering of the Discount Rate ahead of their Interest Rate meeting scheduled for Tuesday the 18^th March.

The BSC announcement rocked the Financial sector. We had been reporting for months that there was a high probability that there would be greater fallout in the finance sector, and that investors should remain very cautious for this sector. Of course, none of knew who or in what form we would hear a major announcement such as this, but it was expected.

BSC had been trading as high as $159.36 only 10-months ago. It closed at $5.96 on Thursday. There would be many investors who have been hurt badly by this activity, and this should act as a warning to investors who hold other Financial stocks in their portfolios.

Twice this year we have been surprised by the Fed Reserve lowering the Discount and Interest Rates at unscheduled times. This action is a clear signal on how worried the Fed Reserve is for the state of the economy.

To date, they have made available up to $400 billion for borrowing, which includes the $200 billion announced last weekend. This is of great concern because the Fed Reserve is worth $800 billion! There is only so much they can offer to lend before the finance sector can no longer be propped up.

But it is not all doom and gloom for this sector. On Tuesday, two leading finance companies reported good profits, helping to lift the sector against the negativity that BSC has produced. Both GS and LEH produced better than expected earnings reports, easing the fears that have been escalating over numerous months.

A wild ride for even the most confident of investors ….

Announcements made last weekend were only the start to the rollercoaster ride. A heavy fall on Monday was followed by a strong rally on Tuesday. Later in the day Tuesday, the FOMC (Federal Open Market Committee) announced a lowering of Interest Rates by ¾% to 2.25%. They stated there was “uncertainty about inflation”, but that it should “moderate in coming quarters”.

This did little to ease investors, and subsequently the markets dropped on the announcement. But there was sufficient buyer demand to lift the markets through the latter afternoon, resulting in a strong day of trading.

Many investors had been hoping there would be further buying activity on Wednesday, but this was not to be the case. Strong selling pressure dragged the markets down as Gold plunged $69 to close at $939 an ounce, while Crude Oil prices all sank 4.5% to close at $104.48 a barrel.

With the US dollar falling, commodities retracing off long-term highs, and a continued high level of uncertainty for investors, the markets sank heavily on Wednesday.

However, another switch in sentiment saw the markets rallying into the end of the week. With Friday’s markets closed due to Easter Friday, Thursday was always going to be an exciting day when considering the announcements made earlier in the week. Buyers subsequently returned to help post a positive result for the week, and to offer some hope that a market bottom may finally have been found.

Caution heading into the next earnings season ….

Many investors are now viewing the markets to have receded enough to warrant accumulation. There is certainly cause for the long-term investor to begin evaluating Blue Chip stocks which do not have exposure to credit risk, but which have fallen due to the negative sentiment that has controlled the markets for the last few months.

Should the markets stabilize over the coming weeks, this will provide a stronger cause for investors to accumulate as it represents the potential of a market bottom. As long as there are no surprise market announcements, this very well could be the best opportunity for consolidation/accumulation we have seen in this downward trend.

But investors should take heed that the first quarter earnings reporting season is not too far away. The end of March is almost nigh, and within a month we will begin experiencing the next round of earnings reports.

Because many companies have been shaken by the retracement in the Finance sector, analysts and economists will be watching these results for signals on how well business has faired through the last quarter.

What this means for the average investor/trader is that they should be cautious at this point in time, and not merely jump into stocks/trades immediately. Patience and clear evaluation of how the markets transpire over the coming few weeks will either confirm that there is potential for a market reversal in trend, or it will confirm that there are greater troubles with this economy than we first had expected.

Economic announcements in the coming week ….

There may not be too much for investors to cheer about in the coming week, as the scheduled economic announcements could all favour the Bears.

On Monday, Existing Home Sales will be released shortly after market open at 10am. As many would be aware, the US housing sector has been suffering a severe recession for the last 18 months (maybe even longer), and expectations for this result is not likely to result in Bullish behaviour.

Consumer Confidence data will be released on Tuesday, also at 10am. As one would expect, results in recent months have reflected the uncertainty that has arisen from the Finance sector. And we are expecting this figure to miss expectations based on market activity over the last month.

Wednesday will find further housing data with New Home Sales at 10am.

Key economic indicators will be released on Thursday, with GDP (final) and Chain Deflator data both at 8.30am before market open. These two indicators will help confirm the state of the economy, and has a high probability of disappointing investors.

Finally, on Friday, Personal Income and Spending and Core PCE Inflation data will be released before market open at 8.30am. Again, this data could weigh heavily on investors with a high probability of not meeting expected targets.

All in all, investors will either be given cause to continue buying stock, or will find cause to take some quick profits.

Market Outlook ….

We are beginning to see signs that maybe investor sentiment believes the markets have retraced enough. The markets are typically weighted with investors buying stocks and wanting share prices to rise. When markets retrace, this is an opportunity to buy at lower prices, and so subsequently the markets will rise over the long-term.

There are times when the markets become over-inflated and they rise too quickly. This will usually be followed by a strong market retracement. And this is what we have experienced over the last 12-months.

So the million dollar question is whether the markets have retraced enough for investors to perceive them to be at “fair value”, or if sentiment remains negative and is waiting for the next big negative announcement to trigger the next downward leg?

Economic activity over the last week suggests the worst may be over for the Finance sector. Much of the credit risk exposure should already have been exposed, and with greater ability to cover their risk (due to the Fed Reserve and international investors), this is the best opportunity for stabilization over the last 6-months.

What concerns us is that this may just be the “eye of the storm”. The markets had begun consolidating ahead of the recent announcements that caused the last retracement. Could we find another major announcement such as the BSC/JPM buyout in the coming weeks?

The answer here is Yes! There is still a potential that the finance sector could produce another unexpected announcement disclosing risk that none of us had been expecting. For this reason, any action by investors or traders should be well thought out.

One would be crazy to think that the Finance sector is a “great buy” right now. It is just too volatile. Commodities are also coming off all time highs after having rallied phenomenally over the last 6-months. Here too the investor would be at high risk if they were to buy stock in related companies.

There are some bargains out there at the moment, and therefore, the wise investor would be able to benefit with medium to long-term investment strategies. However, thoroughly scrutinize the company you are evaluating, considering what impact there has been on its’ business from the recent market retracement.

Strategy Analysis ….

Traders: A consolidation period is one of the hardest trends to trade as direction becomes difficult to choose (unless you are an options trader adopting neutral strategies such as the Straddle). Monitor these markets for the short-term. If you must trade, use less capital and fewer trades.

Option Writers: There is no cause to exit out of Covered Put positions just yet. There is potential that the markets may find further buyer activity in the next couple of weeks, but it only takes 1 announcement to trigger selling fear. Evaluate your position/s and monitor over the coming weeks. It is still too early to be considering Covered Call/Naked Put positions.

Investors: One may consider accumulating stock in companies that have limited exposure to the commodities and the credit risk of the Finance sector. Should the markets continue to retrace, look for the next bottom/consolidation as an “averaging down” opportunity. Maintain limited exposure, however, as we are yet to have confirmation that the medium-term downwards trend has ended.

US Market Commentary – week ending 14th March 2008

2008-03-16T23:47:00.002+10:00

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 27^th.

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 US economy. And this could lead to greater volatility and negativity on the short to medium-term.

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.

US Market Commentary – week ending 7th March 2008

2008-03-09T19:22:00.002+10:00

By Matthew Brown

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 high point has formed, confirming a medium-term downward trend. If further selling pressure persists in the coming week, there is a high probability we will find the markets trading at levels not seen since late 2005 (Russell2000).

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.

US Market Commentary – Week ending 29th February 2008

2008-03-03T21:55:00.000+10:00

By Matthew Brown

A steady week turned into panic selling, focusing on the Financial sector. Economic data confirms a slowing market, giving very little hope for investors. Commodity prices continue to rise, while Federal Reserve Chairman Ben Bernanke fails to provide any support in his speech to the Financial Services Committee.

The major averages stalled at resistance levels, confirming a short-term consolidation pattern following the market retracement that began in October last year. Mild buying activity early in the week was not sufficient to provide a potential upwards break, resulting in a stall in the markets that has resulted in a confirmation of short-term resistance.

For the S&P500 index, a stall below 1,400 points is equal to the previous bearish reversal point that had formed in late January. This clearly suggests that there is unwillingness from buyers as the markets trade up.

Selling pressure was not just designated to Blue Chip stocks (represented by the DOW Jones Industrial Average), or the Financial sector. The broader market, represented by the Russell2000 index, also formed a bearish reversal point on resistance and ended the week pushing for a new short-term low.

With the markets retracing heavily on Friday, we now have a situation where a test of support will occur. If selling pressure persists this week, the markets will push for new lower low points and break down and out of the consolidation patterns. This will leave market participants in a very precarious position, and would find further selling pressure driving the major averages down.

Major news activity for the week includes:

Monday

Standard & Poor’s takes MBI off “credit watch”. ABK affirmed with AAA rating.
ERTS offers $2b for TTWO, and $2.4b private equity buyout of GYI
LOW reports 33% decline in 4^th quarter earnings
Existing home sales dipped 0.4%, and now at a 9-year low. Economists were expecting a 1.8% decline.

Tuesday

IBM directors authorize a $15b stock repurchase program
PPI (Primary Producers Index) higher than expected at 1%. Year over year reading at 7.4%. This is the highest rate since October 1981
Commodity prices increasing with CRB index gaining 1.1%
Consumer Confidence at a 5 year low

Wednesday

Lending caps on FNM and FRE are lifted as at 1^st March.
Federal Reserve Chairman Ben Bernanke gives semiannual testimonial speech to the Financial Services Committee, stating: “the economy continues to face challenging headwinds, and the Fed will likely move to continue fighting those challenges with further rate cuts”.
TOL (a homebuilder) recorded an earnings loss of 61 cents per share. Analysts were expecting a 50 cent loss.
FNM reports a $2.63 per share loss in earnings
MSFT was fined $135b by the EU for violating antitrust laws.

Thursday

Bernanke states “smaller banks may fail”, causing a sell-off in Financials.
Moody’s takes negative ratings action on regional banks
Preliminary GDP remained unchanged.

Friday

Markets plunge!
PCE is better than expected. Personal Spending increased 0.4%, and income increased 0.3%. Core PCE gained 0.3%, indicating rising inflation
Chicago PMI reported at 44.5 in Feb. Below 50 indicates a contraction in manufacturing.
AIG announces a loss of $5.3b.

Economic outlook …

In the last week, investors were focussed on the economy of the country. Their concerns are that with it slowing down, and with the credit industry now being squeezed even tighter, that this could lead the markets to further bearish activity.

And rightly so!

Some of the big investment houses are reporting that there is more exposure to credit risk than was first expected. The outlook for the Housing industry is poor (at best), and not likely to recover any time soon. The FOMC (Federal Open Market Committee) has lowered interest rates heavily, in an effort to stimulate the economy. The Government has released a $160 billion stimulus package, while at the same time major financial companies are “selling debt” to overseas interests.

At the very least, the Financial sector looks grim! Earnings certainly missed their expectations, and now that there is greater debt being carried as creditors tighten their lending facilities, we are likely to find more and more weakness in this sector.

Despite the economy showing further signs that it is slowing, and with the Fed Reserve lowering rates to help stimulate spending, economic data has shown that Inflation remains at a tentative level above the Fed’s target range.

This is a very interesting fact, which will likely play itself out in the coming months. However, this situation is called Stagflation: where there is a period of Inflation combined with slow economic growth. This situation has only previously been experienced in the 1970’s, but could also rear its ugly head again in the naughty’s (00’s).

Last weeks economic data confirmed weakness. In the coming week, there are further key reports that are likely to produce volatility for investors:

Monday

Construction Spending (10.00am)
ISM Index (10.00am)

Tuesday

Auto and Truck Sales

Wednesday

Productivity – Revised (8.30am)
Factory Orders (10.00am)
ISM Services (10.00am)
Fed Reserve Beige book (2.00pm)

Thursday

Pending Home Sales (10.00am)

Friday

Unemployment data (8.30am)

Investors will be particularly interested in the Fed Beige Book, which provides the notes that the FOMC used to decide on Interest Rates at their last meeting. Also of interest will be the Unemployment report, which is one of the 5 key economic indicators used to evaluate the state of the economy.

Market Outlook ….

Hold on for a wild ride!

We are currently at a pivot point where the markets will either hold support, or create a new leg in the medium-term downwards trend that has been persisting since October last year.

For now, there appears to be a greater probability that sellers will continue to persist. We have seen some consolidation on the short-term, however, the lack of buyers suggests there is little incentive for investors to accumulate stock.

Next weeks economic data may be the catalyst for further selling. Investors will be nervous over Fridays Unemployment data and may hesitate through the beginning of the week. However, it is highly likely Pending Home Sales will show poor figures to influence selling activity.

The Fed Beige book would typically give the markets something to react to, however, we feel that this may already be factored into the markets. Especially following Bernanke’s speech mid last week. There’s not much news to look forward to from the Fed Reserve as it is clear to the markets that the economy is slowing, and they are lowering rates to help inspire buying activity.

Should this week show sufficient buying activity to hold the major averages on support levels, we might just find a rally back to the recent resistance levels. However, this outlook seems to be nothing but “hope” at this point in time.

Strategy Analysis ….

Sellers are attempting a break of support, which could lead to a new downward leg in the medium trend.

Traders: Should we find further selling at the beginning of the next week, this could lead to some great short-term Bearish trading opportunities. If you are not on short trades already, look for opportunities in weak sectors such as Financials, Construction and Real Estate.

Option Writers: Covered Put positions remain the strategy of choice, and new positions could be considered at the moment. There is still 3 weeks left until expiration of the March contracts, which could produce reasonable returns. We suggest ITM (In The Money) Covered Puts to manage the risk against any potential upward surges in the markets.

Investors: Should this consolidation pattern (of the major averages) fail and a new downward leg forms, this would not be the time to accumulate stock. If the support does hold, accumulation would be a good strategy. For now, investors should continue to consider defensive action, entering into Put Protection for portfolios. Hold stocks for the time being, unless exposure to Financial, Construction or Property companies is held. These type of stocks should be considered for exiting. Lowering exposure to the markets is also a reasonable strategy should we find further retracement in the coming week.

US Market Commentary – Week ending 29th February 2008

2008-03-02T18:03:00.000+10:00

By Matthew Brown

Major news activity for the week includes:

Monday

Standard & Poor’s takes MBI off “credit watch”. ABK affirmed with AAA rating.
ERTS offers $2b for TTWO, and $2.4b private equity buyout of GYI
LOW reports 33% decline in 4^th quarter earnings
Existing home sales dipped 0.4%, and now at a 9-year low. Economists were expecting a 1.8% decline.

Tuesday

IBM directors authorize a $15b stock repurchase program
PPI (Primary Producers Index) higher than expected at 1%. Year over year reading at 7.4%. This is the highest rate since October 1981
Commodity prices increasing with CRB index gaining 1.1%
Consumer Confidence at a 5 year low

Wednesday

Lending caps on FNM and FRE are lifted as at 1^st March.
Federal Reserve Chairman Ben Bernanke gives semiannual testimonial speech to the Financial Services Committee, stating: “the economy continues to face challenging headwinds, and the Fed will likely move to continue fighting those challenges with further rate cuts”.
TOL (a homebuilder) recorded an earnings loss of 61 cents per share. Analysts were expecting a 50 cent loss.
FNM reports a $2.63 per share loss in earnings
MSFT was fined $135b by the EU for violating antitrust laws.

Thursday

Bernanke states “smaller banks may fail”, causing a sell-off in Financials.
Moody’s takes negative ratings action on regional banks
Preliminary GDP remained unchanged.

Friday

Markets plunge!
PCE is better than expected. Personal Spending increased 0.4%, and income increased 0.3%. Core PCE gained 0.3%, indicating rising inflation
Chicago PMI reported at 44.5 in Feb. Below 50 indicates a contraction in manufacturing.
AIG announces a loss of $5.3b.

Economic outlook …

And rightly so!

Last weeks economic data confirmed weakness. In the coming week, there are further key reports that are likely to produce volatility for investors:

Monday

Construction Spending (10.00am)
ISM Index (10.00am)

Tuesday

Auto and Truck Sales

Wednesday

Productivity – Revised (8.30am)
Factory Orders (10.00am)
ISM Services (10.00am)
Fed Reserve Beige book (2.00pm)

Thursday

Pending Home Sales (10.00am)

Friday

Unemployment data (8.30am)

Market Outlook ….

Hold on for a wild ride!

We are currently at a pivot point where the markets will either hold support, or create a new leg in the medium-term downwards trend that has been persisting since October last year.

Strategy Analysis ….

Sellers are attempting a break of support, which could lead to a new downward leg in the medium trend.

US Market Commentary – week ending 22nd February 2008

2008-02-24T18:06:00.000+10:00

By Matthew Brown

The markets consolidate for another week, helping to form a mild support level. Wednesday was the hub of the week, with most economic activity occurring on this day, however, investors were left with mixed emotions. Although stocks are at bargain prices, they are still hesitant to buy up big at this stage.

Following an extended weekend due to the public holiday on Monday, investors returned to the markets somewhat subdued. Each trading day this week, the markets swung widely from buyers to sellers, resulting in extreme ranges between highs and lows. Typically, if buyers started the day, sellers ended it. And vice versa.

Major headlines for the week included:

Tuesday

Markets flop due to inflation concerns
LEH states it may face its “rockiest” quarter with a potential $1.3 billion in additional write-downs
CS over-valued assets by $2.85 billion
WMT earnings beat expectations by 2 cents, at $1.04 per share.

Wednesday

CPI increased 0.4%, Core increased 0.3%. Both were ahead of expectations, with year-v-year increasing to 4.3%
FOMC minutes from Jan 29-30 meeting released. Inflations expectations remain “anchored”. The Fed raises their core inflation forecast, but cut their GDP forecast.
Crude oil exceeds $100 a barrel
Housing starts rose 0.8%. This is a drop of 21% over the two previous quarters. Building permits slipped 3% to a 16 year low.

Thursday

PMI (Philadelphia Manufacturing Index) fell 24 points. This suggests contraction in the manufacturing activity.

Friday

Late day rally due to an announced bailout plan for bond insurer ABK
Dec PPI (Primary Price Index) revised down to -0.3% from -0.1%

Technical consolidation ….

All the major averages showed sideways activity for the week, maintaining short-term support levels that have formed since early February. Basically, buyers have failed to show sufficient buying support to break upwards, while sellers have eased their pressure from January.

The S&P500 index has shown some mild buyer influence, compared to the Russell2000 index which has shown greater influence from sellers. Bottom line is, however, that there is no real direction sway either way.

The longer the major averages consolidate in a sideways pattern, the greater the potential the markets may find buyers. This is good for investors, but bad for the short-term traders who have a bearish outlook.

Activity such as this also affects volatility. The CBOE VIX index has also consolidated around 25 points. This is still a high value, but without direction does not offer a hint for what activity might transpire in the coming week.

Sentiment ….

Investors are yearning for some good news. We had seen the markets start positively on a couple of occasions this week, only to find them relinquish their gains as fear took over. This caused wild intra-day swings between highs and lows, and suggests continued weakness from buyers.

There was also a large number of very negative announcements, both economically and company specific. Yet, we failed to find significant selling pressure to drive the markets down in a panic.

This last point is actually a positive for long-term investors. Due to a 15% decline in the markets recently, investors may now be at a point where they are perceiving them to be oversold. This could lead to a significant amount of buyer accumulation with stocks at “discounted” prices, and potentially a recovery.

However, it is early days just yet. Although there was a lack of selling pressure on poor economic data, there was also weakness from buyers. And therefore, a stalemate has occurred.

Economics in the week ahead ….

This coming week will be another packed with action as numerous key economic reports are scheduled for release:

Monday: Existing Home Sales for January – after market open

Tuesday: PPI before market open, and Consumer Confidence after market open

Wednesday: Durable Orders before market open, and New Home Sales after market open

Thursday: GDP Preliminary, and Chain Deflator Preliminary. Both before market open.

Friday: Personal Income/Spending, Core PCE Inflation and Prices (all before market open). While Chicago PMI is released just after market open.

Market Outlook ….

Although the Financial sector has consolidated, we are still finding numerous reports in this sector which show that the negativity is not yet over. There is only so long that sellers can withhold reacting to such news, so any future announcements of surprising debt could only lead to a high potential for downward activity.

The economic reports scheduled for release this week are also “high probability” for a reaction by sellers. The Housing market has been hammered for the last 2 years, and there have been no signs that the weakness in this sector is going to ease any time soon.

We also have a number of key Inflation figures scheduled for release. As was shown last week, investors are very nervous over inflation at the moment. The Federal Reserve has been lowering rates at a hefty pace, in an attempt to instigate spending in the economy. However, inflation is trading well outside the Fed’s acceptable level.

Should this weeks figures show a continued increase in inflation, this could influence the Fed Reserve to keep rates on hold – disappointing a market that eagerly wants further rate cuts.

Basically, the Fed is caught between a rock and a hard place. Inflation is currently at a level that suggests increasing interest rates to slow the economy down. However, the economy needs a boost due to the turmoil suffered in the Finance industry for the last year.

Investors will be on the edge of their seats this week, which is likely to increase volatility significantly. Directional activity could go either way, and could flip from one day to the next. Such is the impact of this weeks economic reports. However, if you were to choose the more likely direction of the markets, there is greater weight that sellers are likely to dominant (at this stage).

Strategy Analysis ….

Continued consolidation in the markets offers fewer opportunities all round.

Traders: It is still too risky for short-term traders to enter into positions while there is a lack of direction. Should the major averages break up or down, use this as the trigger for entry into new trades. Until then, we need to patiently wait and monitor.

Option Writers: In normal market conditions, this would be an ideal time to be entering into new Covered Call/Naked Put positions. However, these conditions are far from normal. With greater weighting towards the Bears at the moment, Covered Puts are the preferred strategy to consider. However, while there is risk that these markets may be considered oversold and could continue to consolidate, investors may prefer to manage current positions and not look to enter new trades at this stage.

Investors: As per last weeks statement, this could be an opportunity to accumulate stocks at low prices. Be aware that there is still room for these markets to trade further down. Therefore, only consider entering into new trades if you have a protection plan (such as purchasing Index put options).

US Market Commentary – week ending 15th February 2008

2008-02-17T18:09:00.000+10:00

By Matthew Brown

A topsy-turvy week ended with neither Bulls nor Bears completely controlling the outlook. It was a week of consolidation ahead of a long weekend holiday, offering some hope that a market bottom may have been found.

But don’t rest all your “hope” on buyers returning anytime soon. With the last week starting relatively positively, sellers were dominant heading into Friday. Much of this sell-off was continued uncertainty surrounding the Finance sector and the outlook that the US economy is heading into a Recession.

Investors were given a shock wake-up call from Federal Reserve Chairman Ben Bernanke. On Thursday, in a speech to the US Senate Banking Committee, he alluded to the possibility that the US is “nearing” a Recession. Sellers entered the markets, dragging all sectors down.

Hope for property investors, however, is that with the Fed expecting further slowing in the economy, Interest Rates will be lowered to help spur the economy on. We have already seen 2 large interest rate declines over the last month, with analysts factoring in a another lowering of rates in March.

Markets consolidate ….

Following a month of mixed earnings reports, surprising company announcements, and continued uncertainty to the economic outlook for 2008, the major averages have shown some steadying signs in the last 2 weeks.

Using the Russell2000 index as our benchmark for market performance, we have recently found a higher low point, and a lower high point forming in recent weeks (using a daily chart). This offers some level of stability following a strong market retracement since the peak that had formed in October last year.

However, despite this faint glimpse of hope for investors, it does not signal a return of buyers just yet.

The medium-term trend still remains down, and until we have further sideways consolidation, or an upwards break, investors should not be jumping into the markets just yet. A consolidation could easily still be proceeded by a continuation of the previous trend. In fact, in light of the recent market news and headlines, there is still a stronger probability that sellers will prevail.

For now, a market consolidation gives investors and analysts the opportunity to take stock of their portfolio’s and where the markets may shift next. It is an opportunity for investors to accumulate stock at lower prices, but the “fear” factor surrounding the economy may find a lack of accumulation for now.

Major activity through the last week ….

Monday:

Changes to the DOW Jones Industrial Average: BAC and CVX added, while HON and MO removed

Tuesday:

Warren Buffett offered $800 billion package to MBI, ABK and FGIC Corp for bailout
Government releases “Project Lifeline” to 6 major mortgage lenders, to help avoid foreclosures
GM reports $1.5 billion adjusted loss

Wednesday:

Retail Sales increase 0.3%, better than expected -0.3%
Positive earnings reports help lift markets

Thursday:

Return of sellers
Bernanke speaks to Senate Banking Committee, alluding to possibility that US is nearing a Recession.
FGIC Corp loses AAA rating

Friday:

Follow-up selling after Bernanke speech.

The week ahead ….

After a quiet week for economic announcements, and a month of focus on earnings reports, investors are likely to drag their attention to key economic reports this week in a hope of gaining some insight into the state of the economy.

With Monday a public holiday, it will be a shortened week that is likely to have major impact. Especially in the middle of the week.

On Wednesday, before market open, the release of Building Permits and Housing Permits data will set the tone for the Housing Market. Recent data has shown a continued slowing to this sector, which will prove continued fears for the Housing, Construction and Mortgage Lending sectors.

Also before market open on Wednesday, CPI data will be released. The Consumer Price Index is one of the key pieces of data that the Fed Reserve uses to measure the state of the economy. CPI is a typical measurement of Inflation, which has been running at the higher end of the target range for a few years.

The Fed has been lowering rates to help boost the economy, however, if CPI shows that inflation is still running high, there could be concerns for what action the Fed may take in coming months.

Later in the day on Wednesday, the FOMC (Federal Open Market Committee) will be releasing their minutes from the Jan 30^th meeting. Although analysts have already received the outcome of that meeting (where there was a lowering of Interest Rates), they will scrutinize these notes for any insight into the Fed’s outlook for the economy.

Market Outlook ….

Neither bulls nor bears were completely dominant in the last week. We have a consolidation occurring on the major averages as investors try to take stock of what future activity may occur.

With more and more talk that the US is heading into Recession (if not already there), investors will become far more weary of jumping into the markets. However, as we have seen frequently in recent months, any positive or negative news is likely to see a major reaction on the markets.

For the time being, any buying activity experienced in recent weeks has not shown sufficient depth to suggest buyers are likely to return on the medium-term. This can only lead us to continue maintaining a medium-term Bearish outlook for now. Volume levels have not confirmed buyer accumulation has been strong enough to warrant a change in trend just yet.

Do not be surprised to see a short-term market rally. However, monitor any such movement carefully, and with the first sign of selling pressure expect further downward market direction.

The worst case scenario is that the markets continue to consolidate. Short-term traders will be triggered into new directional positions, and quickly whipped out as the markets fail to trend. For the long-term investor, this is also not a good scenario as it still leaves the markets open for the potential to continue trending downwards.

Strategy Analysis ….

With markets consolidating at the moment, we need to be patient for clear signals of a directional movement. Either upwards, or downwards.

Traders: short-term stock, CFD, or directional option traders should remain on the sidelines for now and monitor for a clear confirmation of market direction. However, option traders may like to adopt the Straddle strategy during these market conditions. The Straddle strategy will allow the trader to benefit from whatever directional movement transpires in the coming weeks, whilst closing the side of the trade that is not benefiting from the market shift.

Option Writers: with February option expiration this weekend, writers will be looking for new positions to enter on market open Tuesday. Due to the non-directional aspect of the markets in the last 2 weeks, it is difficult to confirm whether the option writer should adopt Covered Call or Covered Put positions. For this reason, we suggest conservative positions in both strategies. That is, enter into ITM (In The Money) Covered Call and Covered Put positions. Choose industries wisely (for example: Finance for Covered Put), and we also suggest lowered capital exposure until a market direction presents itself. Current conditions are too risky for Naked strategies.

Investors: now could be a good time to accumulate stock. However, there is still high risk that the markets could continue to retrace, therefore, only enter positions you are willing to hold for the long-term. To decrease the risk of your position/s, we suggest adopting Protection strategies such as purchasing medium/long-term puts against the stock position, or medium/long-term index put options against your portfolio. This should offset any continued market retracement on the position/s. However, if the markets find further stability, or rally, you will still benefit from capital gain.

US Market Commentary – week ending 8th February 2008

2008-02-10T18:12:00.000+10:00

By Matthew Brown

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 US economy is slipping (or has already slipped), into a Recession.

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 high point has formed, signalling a strong potential that further market retracement is highly probable.

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 Nigeria, which is a major supplier to the global crude market, helping to send prices up to $91.77 a barrel at the end of the week.

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.

US Market Commentary – week ending 1st February 2008

2008-02-03T18:14:00.000+10:00

By Matthew Brown

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.

US Market Commentary – week ending 25th January 2008

2008-01-27T18:16:00.000+10:00

By Matthew Brown

The FOMC drops interest rates an unprecedented 75 basis points during one of the most volatile trading weeks experienced in a decade. Many earnings outlooks continue to show weakness heading further into 2008, but the markets were able to show some mild buying activity to close the week in the positive.

The big news of the week was the staggering ¾ percent decrease in Interest Rates to 3.50%. Following the Martin Luther King public holiday on Monday, investors returned to the news that the FOMC (Federal Open Market Committee) had lowered interest rates in an effort to stimulate the economy.

European markets had dumped heavily while the US was taking an extended weekend, and this played havoc on the opening bell Tuesday morning. However, there was relief for Financial stocks that helped entice buyers back into the broader market.

Investors were shocked by the lowering of interest rates as the FOMC is scheduled to meet this coming week, and were expected to lower rates all the same. This rare activity of an early announcement only shows how concerned the Federal Reserve are that the economy could fall into a Recession.

In their statement, the FOMC said they “took this action in view of a weakening of the economic outlook and increasing downside risks to growth" and that, "appreciable downside risks to growth remain."

Many economists are expecting the FOMC to lower rates again on Wednesday, adding further stimulation for investors.

A Counter-Trend rally …

Although it was an extremely volatile week, buyers were able to dominate enough to post gains on the major averages. The Russell2000 index was able to produce an 8.3% gain for the week, whereas the other major averages only showed a mild rise.

The Russell2000 index, which has retraced more than 20% since the peak mid last year, has formed a Piercing Line candlestick pattern at a support level from a previous low point from mid-2006.

Trading in the coming 2 weeks will denote whether or not this support will hold, or if this is a counter-trend rally against the a 3-month medium-term downwards trend.

Sentiment from the last week would suggest that investors are more willing to buy oversold stocks, however, caution must be taken as there was a lot of “short covering” this week. Short Covering is where traders who are “Shorting the market” (profiting from falling stock prices) are exiting their positions. To do this, they Buy Back their Short position. This accumulated buying helps lift stock prices.

For the time being, investors must remain cautious because 1-week of rallying does not make a trend. Technically, this is classified as a “counter-trend” movement and until such time as a new trend forms, should not be traded.

Thus, we may find another week or two of rallying markets, but according to trend experience, we should be monitoring for signs that sellers are re-entering the markets.

Volatility traded back to record high levels …

The CBOE VIX index (Volatility index) is considered the “investor fear gauge”. When it is trading high, investors are fearful of further falling markets. When it is low, investors are comfortable with the markets, and we typically find a steady upwards trending scenario.

In the last week, the VIX index rallied up to its highest level in 5-years. In fact, its highest level since the 2000 Tech Wreck when the Technology bubble burst with an almighty bang!

This is the second time in 6-months that the VIX has traded up to this level, denoting the strong level of fear from investors. It eased over the last few trading sessions but remains at high levels.

For the avid investor/trader, this is a clear confirmation to be cautious for the time being. There is still a reasonable potential that these markets might continue the medium-term downwards trend, with strong fluctuations from day to day.

Earnings results are generally poor …

With a strong week of earnings reports behind us, investors will be looking to the week ahead for further clarity to the state of the economy. Some big Technology companies reported this week, including AAPL, EBAY and MOT (both of which had reported a weaker outlook).

The Feds decision to lower rates took the focus away from these earnings results, but this will only be for a short-time. In the week ahead, the following earnings reports are likely to be influential to the broader market:

Monday
AXP	Time not Supplied
HAL	Before Market Open
MCD	Before Market Open
VZ	Time not Supplied
Tuesday
MMM	Time not Supplied
CAH	Before Market Open
CFC	Before Market Open
LLY	Before Market Open
LXK	Before Market Open
OXY	Before Market Open
DOW	Before Market Open
X	Time not Supplied
USG	Time not Supplied
VLO	Before Market Open
YHOO	Time not Supplied
Wednesday
MO	Time not Supplied
AMZN	After Market Close
HMC	1:00am ET
LIHR	Time not Supplied
MRK	Before Market Open
SBUX	After Market Close
BA	Before Market Open
UPS	7:45am ET
Thursday
BMY	Time not Supplied
CL	Before Market Open
GOOG	After Market Close
LLL	Before Market Open
MRO	Before Market Open
MA	Time not Supplied
PG	Time not Supplied
SNE	Before Market Open
Friday
XOM	Before Market Open
ERIC	Time not Supplied

Of particular interest are the Technology and Oil sectors. Investors should watch the market reaction to results from companies related to these 2 sectors for clarity on broader market confidence.

Economic activity …

In the last week, there was literally only 1 economic announcement for investors to be concerned with. On Thursday, Existing Home Sales figures were released. Poor results show that there was a decline of 2.2% from December, while the median sale price of existing homes was down 6% from the same period a year ago.

For the week ahead, there will be far more exciting activity to monitor:

Monday	New Home Sales
Tuesday	Durable Orders
	Consumer Confidence
Wednesday	GDP Advanced
	Chain Deflator Advanced
	FOMC Policy Statement
Thursday	Personal Income/Spending
	Core PCE Inflation
	Chicago PMI
Friday	Auto/Truck Sales
	Unemployment

Of note, the FOMC Monetary Policy statement and Unemployment data will be key to investor confidence. Advanced data for GDP and Inflation will also influence investor confidence.

Analysts Outlook ….

Volatility was the key to the markets last week, and it is likely to remain much the same this coming week. With some key economic and earnings reports scheduled throughout the week, investors will be awash with information.

If the economy is truly slowing, as many economists are suggesting, then we should continue to see poorer earnings outlooks. The economic data should also continue to reflect much the same.

For this reason, we would put more weight into the markets finding renewed selling pressure in the week ahead. Volatility will remain, and we may even find buyers lifting the markets on positive news, however, last weeks activity was not as bullish as one would have expected a ¾ point drop in interest rates to provide.

Some mild buyer activity may continue. The probability is low, but with so many key reports scheduled, investors might be surprised. The key to the week will come on Wednesday with the FOMC monetary policy statement. If they lower rates again, investors will buy up stock.

Strategy Analysis …

This lends opportunity for the avid investor/trader. Monitor the markets for weakness in sentiment. Should sellers begin to enter the markets, adopt Bearish strategies. Continued buying activity should not find any participation at this stage due to the “counter-trend” nature of the movement.

Traders: adopt bearish, short-term, strategies. Monitor for a Bearish reversal of the markets to enter new positions.

Investors: Hold. Do not accumulate stock at this stage, as 1 week of upward activity does not mean recovery is underway. Long-term portfolios that are unprotected could have Put options purchased for protection. Concerned investors may use this rally as an opportunity to exit.

Option Writers: Maintain Covered Put positions. Do not enter Covered Call or Naked Put strategies.

US Market Report – week ending 18th January 2008

2008-01-20T18:18:00.000+10:00

By Matthew Brown

Doom and Gloom! Bears take control of the markets for another week, resulting in a 4^th straight week of losses. Financial stocks were pummelled while the market stalwart, Technology, found little incentive to hold its ground. Now, with the major averages maintaining a 15% decrease since last years highs, do we have a clear definition of a Bear market?

Monday the 21^st January is a US public holiday (Martin Luther King Day), and therefore, the markets will be closed. The long weekend will either give investors the chance to take see this as a buying potential as stocks trade at lower prices, or time to evaluate how much further these markets may continue to fall.

For the week that was, there was little to incite investors to accumulate stocks. Those who have been expecting a market bottom would have bought into stocks early in the week after IBM triggered buyer activity on a strong earnings report.

However, this positive activity failed to lift the markets from Tuesday onwards, resulting in another strong downwards push on the major averages:

DOW Jones Industrial Average: -4% for the week
NASDAQ index: -5.2% for the week
S&P500 index: -5.5% for the week
Russell2000 index: -4.6% for the week.

Medium-term support levels have all been breached for each of the above mentioned indexes, with clearly defined lower highs and lower lows. Therefore, downward trends are now the predominant medium-term trend for the US markets in general.

Using the Russell2000 index as our benchmark for performance, there has now been a decline of more than 20% since the peak that formed mid last year. This index has retraced to a support level that had formed in mid-2006, and unless there is some real incentive for buyers to return, has a strong probability of continuing to trend downwards.

By all accounts, this is a Bear market. Even the announcement by President Bush of a Fiscal Stimulus package worth $140 billion did little to entice investors back to buy.

Investors were hit with a double whammy this week. Not only did earnings season cause widespread panic, but poor economic reports showed the economy slowing at a manufacturing level as well as with consumer confidence.

We had highlighted the fact that Financial stocks would be in the headlines this week due to the large number of companies from that sector reporting earnings. As we had expected, the Financial sector retraced 2.5% on a continuation from the previous weeks decline of more than 5%.

Highlights from the last week:

Monday	IBM releases earnings details, lifting the markets
Tuesday	C (Citigroup) earnings decline Financial sector falls 3.7% Retail Sales figures show slowing in spending
Wednesday	INTC earnings fall, dragging markets down CPI released, coming in as expected at 0.2%
Thursday	Philadelphia Fed Index declines a whopping 20.9 points. The lowest level since Oct ’01 (expectations were 1.5 point decline) MER earnings decline Housing Starts and Permits figures fall
Friday	GE earnings decline Insurers drag markets down (ABK and MBI) S (Sprint Nextel) earnings decline President Bush announces fiscal stimulus package of $140 billion

Economic announcements played a major part in the confidence of investors through the last week. Some of the most influential data was released, right at a time when investors were also disappointed with earnings results. Hence the heavy fall in the markets.

The coming week, however, there is very little in the way of economic reporting. The only real influential report is due on Thursday 24^th, just after market open, with the Existing Home Sales for December. If last weeks housing data is anything to go by, we should expect a great decline in this figure than expected, causing the markets to find sellers, especially in the Construction, Housing (Real Estate), and Mortgage lending sectors.

Earnings season is in full swing ….

The first heavy week of releases has resulted in a strong market decline.

Tuesday
ABK	Before Market Open
AAPL	After Market Close
BAC	Time not Supplied
CREE	Time not Supplied
FITB	Before market Open
JNJ	Time not Supplied
TXN	Time not Supplied
UNH	Before Market Open
WB	Time not Supplied
Wednesday
COF	4:05pm ET
COH	Before Market Open
COP	Before Market Open
DAL	Time not Supplied
EBAY	Time not Supplied
FCX	Before Market Open
GD	Time not Supplied
GILD	After Market Close
MOT	Before Market Open
PFE	Before Market Open
QLGC	After Market Close
QCOM	After Market Close
LUV	Time not Supplied
STJ	Before Market Open
UTX	Before Market Open
VAR	After Market Close
Thursday
T	Before Market Open
F	Before Market Open
LMT	Time not Supplied
MSFT	After Market Close
NOK	06:00am ET
JAVA	Time not Supplied
XRX	Before Market Open
Friday
CAT	Before Market Open
HOG	Before Market Open
HON	Before Market Open

Again, this coming week will have a heavy influence from Financial stocks. Technology is heavily represented by AAPL and EBAY and MSFT, while some of the Blue Chip companies such as CAT, GD, and PFE are scheduled for release as well.

Analysts Outlook ….

There are only 2 reasons the markets may rally this coming week: 1) relief from selling pressure as stocks are viewed as “oversold”, or 2) earnings reports incite enough Bullish sentiment to trigger buyer accumulation.

Certainly, with the markets retracing heavily in the last 4 weeks, one would expect some buyer relief some time soon. And with the advantage of only 1 key economic report this week, all focus will turn towards earnings data.

Any Bullish activity this week should be viewed as a “counter-trend” movement. That is, a short-term rally against the medium-term downwards trend. Don’t be fooled that this will turn into a stronger upwards movement, resulting in a recovery in the markets. Until we have sufficient buyer activity over (at least) a few weeks, there could be no certainty that the markets will recover sufficiently to resume the previous Bull market any time soon.

Therefore, if the markets do rally slightly this week, investors/traders could use this as an opportunity to enter into new Bearish positions.

Probability is strong for continued selling pressure in the markets. Relief from that selling will occur some time over the coming few weeks, however, is not expected to be more than a short-term rally.

Strategy Analysis …

Traders: Anyone who holds a Bullish position right now is playing with fire. Look to take profits from Bearish positions this week, if a short-term rally occurs, and monitor for exhaustion turning into a new Bearish reversal.

Investors: Use any short-term rally as a means to exit stock positions, or enter into Protection strategies. However, the cost of put options will have increased dramatically in recent weeks, and may be too costly to adopt. There are no signs that the markets are finding a bottom, which confirms the need to exit positions and wait until this Bear movement is over.

Option Writers: January expiration occurred over the weekend, and writers will now be looking to enter into new positions. However, due to the trend and outlook of the markets, writing Covered Calls or Naked Puts are very risky strategies to adopt right now. To be conservative (during this time of high volatility), writers could consider ITM Covered Put positions.

US Market Report – week ending 11th January 2008

2008-01-13T18:20:00.000+10:00

By Matthew Brown

Earnings season hits the markets at a time when investors are attempting to dodge a “recessionary bullet”. Signs of some positivity failed to abate investor fears, however. Selling pressure continued through the week, denoting a market downtrend.

Investors were uncertain as market activity resumed on Monday 7^th January. Majority of traders, investors and market participants were now completely back from their Christmas/New Years holidays, and began taking account of the market activity that occurred over the previous few weeks.

As FMR Analysts had reported in last weeks market report, the retracement of the markets up to that point was at a pivotal point. Having retraced to a strong medium-term support level, a return of buyers was likely to produce a medium-term sideways market. However, sellers have persisted overall, and this validates signals for further Bearish activity.

The S&P500 index, which is considered the benchmark for economic performance of the US markets, has now created lower high and lower low points since its peak in mid-October 2007. This 4-month medium-term trend is a counter-trend movement against the long-term upwards trend that began in early 2003, however, is very significant when we consider: a) the October peak stalled at the previous high point established in July of last year, and b) the last 2 support levels have been breached with the recent retracement, with current activity preparing to breach the next support level.

Cross analysis of the Russell2000 index accentuates the same picture. This broader index has broken support levels, formed a downwards trend and is also preparing to breach the next support level, which would clearly denote a change in the long-term trend.

All-in-all, the signals for investors are add up to a strong probability of a Bear market occurring.

Sentiment has sided with the Bears, but there is always HOPE ….

The CBOE VIX index, commonly referred to as the “investor fear gauge”, has rallied significantly over recent weeks. With the markets retracing heavily of late, we would have expected much stronger upward activity on this index, however, there has been some consolidation in recent days.

Certainly the Wednesday/Thursday rally experienced due to stronger earnings announcements, and possibly from “bottom fisher’s” accumulating stock at low prices, may have contributed to the activity on the VIX. But with earnings season only just starting, and a large degree of uncertainty still remaining in the Financial sector, we do not expect the VIX to ease significantly on the short-term.

Investor sentiment has at a deep low right now. They are hesitant to accumulate stock while so much negative news activity remains, and with a high level of uncertainty in their outlook for 2008, investors are not willing to commit additional funds to the markets right now.

Hope remains the only factor for sentiment right now. Hope that earnings season will produce stronger than expected results, and hope that the Subprime/CDO influence on Financial earnings has already seen its worse affect on the markets.

Activity from the past week …

Market activity from the last week was shaped by continued concerns for the Financial sector, fears that the Retail sector has performed poorly over the Christmas/New Years period, stronger signals that the US Economy is shifting closer to a Recession, and reserved anticipation for earnings results over the coming weeks.

Following are some of the headlines from the past week:

· Rumours that CFC was looking to file bankruptcy papers sent the markets falling on Tuesday. However, on Thursday an announcement was made from BAC that they will purchase the struggling mortgage lender for $4 billion.

· Telecommunications giant T (AT&T) announced on Tuesday their business was under-performing due to the slowing economy.

· MBI cut its dividend as the Insurance company struggles following the Credit Crunch. They will also be attempting to raise $1 billion of new debt.

· AA released their earnings report after market close Wednesday. Results were stronger than expected, raising investor hopes for a good earnings season.

· Fed Reserve Chairman Ben Bernanke gave a speech on the economy Thursday. He said “additional policy easing may be necessary, and that the Fed stands ready to take substantive additional action”.

· The Bank of England and the European Central Bank kept their Interest Rates steady.

· COF decreased their profit outlook for the 4^th quarter 2007.

· Many Retailers have reported disappointing same-store sales for the last quarter. However, leaders WMT and TGT have reported good results.

Looking ahead …

Economic data and Earnings reports will be the major influence for the week ahead.

On Tuesday, Retail Sales figures for December will be released. The impact of a slowing economy will either be confirmed or negated with how much spending activity consumers undertook during the holiday season.

Also on Tuesday, the PPI (Primary Producers Index) will be released. This report helps outline economic inflation. Economists will be looking for signs that 2008 is heading into a Recession.

On Wednesday, the all important CPI (Consumer Price Index) will be released before market open. Again, this report is critical in measuring economic inflation and is one of the key 5 indicators to measure the strength of the economy.

Later on Wednesday, the Federal Reserve will release the Beige Book – notes from all of the country’s Federal Reserves. Analysts will scour this report for hints the Fed may lower/raise rates at their next meeting.

For Thursday, focus will switch to the Housing sector as Housing Starts and Building Permits will be released before market open. The Housing and Construction sectors have suffered from a falling market and the recent Subprime/Credit Crunch.

There are other reports scheduled through the remainder of the week, but will not carry as much important as the above.

Earnings reports of interest, and which may have an impact on market movement, include:

Tuesday
C	Before Market Open
INTC	Time not Supplied
USB	Before Market Open
Wednesday
JPM	07:00 am ET
WFC	Before Market Open
Thursday
AMTD	Before Market Open
BK	Before Market Open
CAL	Before Market Open
IBM	After Market Close
MER	Time not Supplied
WM	After Market Close
XLNX	After Market Close
Friday
GE	Before Market Open
SLB	Time not Supplied

There is a heavy influence from the Financial sector in earnings releases this week. Therefore, we could expect a great deal of volatility, and a high probability of further negative influence on the markets as a whole.

FMR Analysts Outlook …

Market negativity has continued, and strengthened the outlook for the Bears. Some mid-week buyer relief came on some positive news, but failed to find any follow-up. Investors are extremely nervous that the economy is sliding into Recession, and this is leading to greater profit taking on any short-term market rallies.

The coming week is likely to be just as volatile as the week we have just experienced. A plethora of news events is just on our doorstep and is likely to give us a mix of positive and negative results. This truly is a tough period for the beginner investor/trader to consider entering into new positions.

Based on analysis of the economic reports and earnings results scheduled for release this coming week, FMR Analysts is expecting the Bulls to continue maintaining control. There is heavy weighting to the Financial sector in earnings results, while Housing data is not likely to produce any surprises. The release of the CPI, PPI and Fed Beige Book could find some relief buying, but expectations are that Bears will push the markets following this data.

Investors are already flocking to the “safer” sectors as the markets have shown a lack of effort in recovering on positive news. This in itself should be a reasonable sign for caution.

Options Expiration will occur at the end of this week, as well as an extended weekend due to a US Public Holiday on Monday the 21^st January. Investors are not likely to want to hold onto stocks heading into the long-weekend, while Options Expiration will see a large increase of activity as traders/investors look to Roll/Reverse/Exit positions before expiration.

FMR Strategy Analysis …

Traders: Continue to adopt short-term Bearish strategies, using any short-term upward movements as a set-up for entering new bearish trades (only once bearish reversal alerts have been given).

Investors: Downsizing of investment portfolio’s and adoption of risk protection strategies is imperative at this point. Each week the probability of a Bear market strengthens as the economy fails to produce substantial evidence to warrant accumulating stocks at these lower values.

Option Writers: January expiration is coming up this week ending. Many of you may need to make some “hard” decisions on whether to close positions, or let them be exercised. Take into consideration the high risk of the markets at the moment when making your decision. Covered Put Writing is the safer choice for writers at the moment, while Covered Call and Naked Put strategies have a large level of risk for the next month.

US Market Report – week ending 4th January 2008

2008-01-06T18:22:00.000+10:00

By Matthew Brown

Stocks are pummeled in the first few trading days of 2008, resulting in one of the strongest market declines experienced since the 2000 Tech Wreck. The Finance and Retail sectors are trading at record lows, while Technology stocks relinquished the only hope Investors had for market stabilization. Economic data has investors now fearing an economic Recession in 2008.

In November and December of 2007, the S&P500 index had held support above 1,430 points. This support level was broken on Friday as the markets gave way to extreme selling pressure due to weakening Housing and Financial markets and fears that a Recession is looming in the coming 12-months.

Over the last 12-months, the US markets have slowed in conjunction with a slowing economy. Inflation had been well above the Central Banks preferred levels, resulting in Interest Rates increasing. However, at the same time, there was an underlying volcano about to erupt.

It began with the end of the Housing Boom. The first signs came from Construction companies, which have now been trending down for almost 2-years. This led to the recent CDO (Collateralized Debt Obligation) credit problems that the Finance industry has faced, and ultimately to the consumer who is now faced with higher Interest Rates, higher cost of living, a weakening stock market, a softening Housing market, and as of Friday, weaker Employment opportunities.

The Employment report was released on Friday, resulting in a weaker than expected figure for job growth. Non-farm payrolls increased a mere 18,000 in December compared to economists expectations of 70,000. At the same time, the Unemployment rate increased to 5.0%, up from 4.7% the previous month.

It was this final figure that was the trigger for the selling pressure seen on Friday. The markets were already weak, but a strong increase in the Unemployment figure (especially at Christmas time), is a sign that the economy is certainly on the verge of further weakness.

Further signals that a Bear market is on the horizon …

Analysis of the major indexes shows the greatest threat for a Bear market since the 2000 Tech Wreck. In one foul swoop, last weeks bearish activity has almost wiped out the minor gains made in 2007, and placed technical analysts on the verge of declaring a Bear Market.

Lower High points and Lower Low points since the market peak in October last year are clearly defined for the S&P500 index (considered the economic benchmark for the US markets). As previously mentioned, we also have a strong break of previous support established in the last two major attempts from sellers to drive the markets downwards.

The next step towards defining a Bear market will be a downward break of the low point that had formed in Feb/Mar 2007. If we find the markets continuing to trend downwards over the coming month, a breach of this level is highly likely, and would result in a “Change of Trend” situation.

The situation for the Russell2000 index, which FMR Analysts uses as our benchmark for market performance, accentuates the same activity. However, there is a greater expectation for a market fall when this index is analysed.

Strong resistance at the market peak of 850 points on the Russell2000 defined a level at which the Bulls were exhausted. Through 2007, there were 3 points where selling pressure had attempted to drive the markets down, only to find support around 750 points.

This had created a sideways trading range, which could be found at the top of a long-term upwards trend. This pattern could be considered a “Consolidation” pattern, and with the resulting downwards break over the last week, we have the alert for a “Change in Trend”.

Volatility confirms seller bias …

Regular readers of the FMR weekly market report will be aware of our association with the CBOE Volatility Index (VIX). This indicator is considered the “investor fear gauge” and is used as a confirmation of market sentiment.

Clearly, the markets are consumed with fear at the moment. The VIX indicator has risen from approximately 18.50 points to nearly 24 points in the last 2 weeks. At this level, the VIX is mid-range of its activity from the last 6-months. The 2 peaks which had formed during the strong downwards shifts of late 2007 form around 30 points, and if we find further selling pressure on the short-term, it is highly likely we will find this index trading back at these levels very shortly.

A week that failed to find any positive economic activity …

Following the New Years Day closure of the markets, investors and traders were welcomed back with some extremely important economic news. On Wednesday, the release of the FOMC (Federal Open Market Committee) minutes from their December meeting on Monetary Policy (Interest Rates) was a major focus.

Through the rest of the week, data for Auto & Truck Sales, Manufacturing data, Factory Orders, Durable Goods Orders, and a rising Crude Oil were all factors leading to selling pressure in the markets. Following is a brief summary of those influences:

FOMC minutes: failed to ease investors fears for a Recession
Auto Sales: missed expectations, fuelling concerns over Consumer Spending
Manufacturing: decreased in December, with ISM Index falling from 50.8 to 47.7 (below 50 suggests a “contraction” in manufacturing).
Services Sector: grew at a decreasing rate from the previous month
Crude Oil: traded above $100 a barrel.

Investors will be wanting some respite from economic reports over the next week, but are not likely to find it. Both Monday and Wednesday are clear of reports, however, on Tuesday will be the release of Pending Home Sales and Consumer Credit data. On Friday, Import/Export Prices, the Trade Balance and Treasury Budget may also fuel economic fears.

Earnings season looms …

Looking ahead over the next month, 4^th quarter 07 Earnings results will officially begin with the release of AA (Alcoa’s) results after market close on Wednesday. Although the first week will be relatively quiet, the following few weeks will find a plethora of earnings reports reaching the newswires.

Earnings season is always exciting, but none more then this quarters’ releases.

Results from the previous earnings reports failed to inspire confidence in the business sector. Many reports failed to meet expectations, while there were many others that had previously been downgraded prior to their reporting.

So the big question for the coming few weeks is whether businesses have been able to improve their profitability over the last few months, or whether there is a greater sign that an economic Recession is looming ahead?

FMR Analysts Outlook …

FMR Analysts is expecting this earnings season to create a great deal of volatility in the markets. We are not confident that investors will be pleased with the overall results that will be presented in the coming weeks, which has a high probability of resulting in further bearish market activity.

The Retail sector has failed to tout strong results from Christmas Shopping. And a week later, there is still a great deal of uncertainty as to whether this has been a strong spending season for consumers. Do not be surprised to see poor results over the coming weeks from this sector.

Finance continues to be the burden on the markets, and the economy. There is nothing positive to read about this sector, and the outlook is just as poor. With Central Banks pumping cash into economy’s around the world, and with Billions (almost Trillions) of dollars being written off by institutions, this surely has to have a negative affect on company earnings.

Energy, however, may be one of the saving graces for investors. With higher energy costs and continued high consumption, this sector has remained steady during the last several months, despite broader economic fears.

All signs suggest further Bearish activity over the medium-term, however, which is the outlook FMR Analysts will maintain for the time being. Depending on economic results this week, we may find some mild buyer relief, however, any investor who perceives this as a “buying opportunity” will be putting their capital at a very high risk.

FMR Strategy Analysis …

Traders: Short-term Bearish strategies should be adopted. Any minor/mild market rallies should be viewed as “counter-trend” activities, and subsequently monitored for Bearish reversal patterns.

Investors: Likewise, investors need to adopt Bearish and/or Protection Strategies. For a number of weeks, we have been reiterating the point that Investors should be downsizing their market exposure or adopting Protection strategies where feasible. With turbulent times ahead, and a high probability of further market decreases, it will be a testing time for any investor holding stock positions.

Option Writers: Following our recent declaration of switching to Covered Put Writing, investors should now be seriously considering their option writing portfolio. Covered Call positions will have lost (be losing), on capital value. Exiting positions until the markets have bottomed out is typically the safest strategy to adopt in this scenario. Chasing option premium on falling stocks is not a sound strategy, especially if you need to adopt a Rolling up strategy at a later date. Exit positions and patiently wait for a return of Bulls in the future. Needless to say, Naked Put writers should be completely out of this market as the Risk is far too high to hold positions in this strategy.

US Market Report – week ending 28th December 2007

2007-12-30T18:25:00.000+10:00

By Matthew Brown

Heading into Christmas, investors lifted the markets in a relief rally suggesting 2007 may end on a positive note. However, trading activity in the final week of the year has been anything but positive.

Numerous factors have led to a sell-off in the final trading days ahead of New Year:

Fear Retailers will not reach sales targets
Auto Manufacturers posting poor 2007 results
Continued weakness in the Housing sector
Uncertainty with Financial stocks, and
The Assassination of Pakistan’s opposition leader Benazir Bhutto.

This latter point is of great concern to the US government as Pakistan is on the front line in the war against terrorism. In fact, it has been widely reported that Al Qaeda supporters heading to Afghanistan are doing so through the country of Pakistan. The reaction of the markets was to Sell, however, this was not the only reason for sellers to enter post-Christmas celebrations.

Analysts at research firm Goldman Sachs (GS), reported that they expect Financial heavy weight C (Citigroup) to cut its dividend by 40%. At the same time, Goldman also wrote down their earnings estimates for JPM and MER.

On the economic front, Durable Goods orders (also released on Thursday), increased slightly by 0.1%. Though, not as strong as some economists were expecting (2.2%). Still, this data does not suggest a “recession”, which might actually boost the concerns of those worried that Inflation will be a major factor heading into 2008.

Crude Oil prices have also traded back up to their long-term high prices, trading just under $100 a barrel at $96.00 (as at close Friday 28^th Dec). This is one of the leading influences on Inflation at the moment. As the US shifts into winter mode, the cost of heating oil, natural gas, and fuel is likely to continue influencing the cost of living.

The Markets are consolidating …

Activity of the major indicies over the last week suggest a new sideways trading range may have emerged. Following the heavy retracement of the markets through November, 2 short-term rallies have met with resistance. This suggests investors are not eager to accumulate stocks at the moment.

The Russell2000 index has found resistance at 800 points, following strong support around 735 points. It would appear that a short-term trading range has formed at 18-month lows.

Should sellers continue to influence the markets early in the New Year, there is a strong potential that these sellers will attempt another break downwards. Most market participants will be very wary of this, watching the markets intently in the next week and a half.

This activity is very similar to the consolidation we had experienced in August September, following the major market reaction to the Subprime fallout. Investors will be looking for some major news to influence market direction. There may be an attempt to rally, but in the same fashion we had experienced only 4-months previously, FMR Analysts does not expect that rally to result in a Bull trend.

Volatility back on the rise …

For the 2^nd half of 2007, the CBOE Volatility Index (VIX) has remained in a long-term high trading range. There had been some relief heading out of November and into December, but we are again experiencing a rise in this “Fear Gauge”.

Should the VIX index continue to rise on the short-term, this would suggest a continued downward market is highly probable. Investors should be wary of this, and look for opportunities to decrease position sizes, or adopt protection strategies where necessary.

Heading into 2008 … FMR Analysts Outlook

The beginning of the New Year is likely to be just as exciting (and interesting) as the end of 2007.

The markets are consolidating at the moment, and most news activity seems to be hinging on the negative. Especially towards Retail Sales numbers (for the Christmas period), and the Financial sector.

Finance stocks are not out of the woods just yet. Despite the fact that the markets have not reacted bearishly towards negative news in this sector over the last 2 weeks, FMR Analysts are still expecting further fallout towards the Subprime/CDO (Collateralized Debt Obligations).

At time of writing (New Years Eve), there had been no positive news reports for the Retail sector. The “buying rush” retailers had been hoping for before Christmas, and again post-Christmas, never eventuated.

This could be a clear sign to the business community that Consumer Spending has been put on hold. Those analysts expecting a Recession will agree that this would be the trigger to a Bear market through 2008.

We would like to say that “not all is doom and gloom”, but there is very little positive activity that we expect to kick-start the new year. The strongest sectors over recent months have been in Technology, but if Recessionary conditions prevail over coming months, not even the likes of AAPL, GOOG and MSFT will be able to withstand the barrage of panic sellers.

FMR Strategy Analysis …

Traders: With a short-term bearish reversal over the last two trading session, at Resistance, this is a trigger for short-term Bearish strategies. Don’t be greedy with the profits, however, as there is a very strong support with these markets. Set your profit targets, and be prepared to exit Bear positions should a higher low form on the major averages.

Investors: The recent market rally has given investors an opportunity to decrease position sizes, and/or enter into new Protection strategies (if you haven’t already done so). The markets are consolidating right now, however, there is a heavy weighting towards a Bearish outlook for the next few months.

Option Writers: ITM (In-The-Money) Covered Put positions (a conservative strategy) should be considered due to the higher risk of a falling market. Covered Calls, whether ITM or ATM, hold too much risk right now. Naked Put writers should also remain on the sidelines for now. Should the markets retrace to support and hold (this is a very important factor), this might offer an opportunity to enter conservative Covered Call or Naked Put positions. For now, however, while a Bearish outlook remains, Covered Puts appear to be a safer strategy.

US Market Report – week ending 14th December 2007

2007-12-16T18:28:00.000+10:00

By Matthew Brown

A disappointing FOMC Monetary Policy adjustment and worrying Inflation data caused investors to exit the markets this week. The Financial sector continues to provide bad news, fuelling the exodus. While the Retail sector is suffering from lower sales heading into the final week before Christmas.

Investors traded cautiously at the start of the week, ahead of the FOMC’s (Federal Open Market Committee’s) announcement on Monetary Policy on Tuesday afternoon. There was much expectation that the FOMC would lower Interest Rates by half a percent, alleviating the Financial sectors credit problems.

However, this was not to be the case.

The FOMC released a quarter percent reduction in the base rate to 4.25%, stating that higher energy and commodity prices could find inflationary concerns in 2008. They are concerned with a slowing economy, however, inflation is by no means completely under control.

By the end of trading on Tuesday, the DOW Jones Industrial Average closed down 294 points, or 2.1%. The S&P500 index had lost 39 points, or 2.5%, the NASDAQ index had lost 71 points, or 2.6%, while the Russell2000 index had lost 26 points, or 3.3%.

As FMR Analysts had discussed in the previous weekly report, the market reaction to this would set the trend for the remainder of the week. There was some uncertainty through Wednesday and Thursday, but sellers continued to influence the markets on Friday, heading into the end of the week.

With all major averages closing near their weekly lows, it was a strong domination from sellers. Weekly results for the major averages are as follows:

DOW Jones Industrial Average = -284 points, or -2.08%

NASDAQ = -75 points, or -2.76%

S&P500 = -38 points, or -2.52%

Russell2000 = -33 points, or -4.19%

Inflationary pressures likely to limit an Interest Rate lowering …

Later in the week, the release of the PPI (Producer Price Index) and CPI (Consumer Price Index) data suggested that although the US economy is clearly showing a slowing in growth, that there are still inflationary pressures remaining.

Most of these pressures are based on higher energy costs. Although trading below its all time record high of $98.70 a barrel, set in late November this year, Crude Oil prices are still high. As of Friday’s closing value, crude was trading at $92.25 a barrel.

As demand for heating oil, natural gas and gasoline are increasing heading into winter, investors are likely to feel the crunch in their “savings”. The FOMC had warned of this in their latest Monetary Policy statement, and this was confirmed on Thursday and Friday when the PPI and CPI data was released.

The PPI had increased a massive 3.2% due to rising energy prices, rocketing to record level. This was far greater than analysts had expected. PPI measures prices of goods at a wholesale level. Prices of goods at the beginning, and intermediate stages, of production can provide insight into inflationary pressures. Along with commodity prices, this can be a leading indication as to the prices of goods at a consumer level (CPI).

CPI was then released on Friday, and it too provided concerns for inflation. For the same energy reasons, the CPI increased 0.8% in November, with Core CPI (excluding Food and Energy), also increasing unexpectedly.

Usually we will see the PPI acting as a leading indicator to the CPI. This is due to the pressures of rising costs at a wholesale level taking a little time to flow through to the consumer. However, there is not a great deal of lag time in this effect, so many economists are concerned over next months results. The FOMC uses the CPI data as one of its main inflation indicators.

Retailers are struggling, and putting hope into a last minute spending spree …

The Christmas shopping season is the busiest, and most profitable period of the year for Retail companies. In years gone by, analysts and investors could count on a “pre-Christmas” market rally based on expectations of consumer spending during this period.

However, in more recent years, shoppers have delayed their spending habits, waiting for the post-Christmas sales and discounts to buy up big. The pre-Christmas rush has dwindled and kept Retailers on edge to whether it will be a profitable season or not. A poor Christmas shopping season usually spells disaster for annual profits.

This year is no exception. Poor weather across a large portion of the country and uncertainty over the direction of the economy have led to a poor week of spending.

Internet shopping has become more popular in recent years, but shoppers cannot purchase and receive goods the week before Christmas due to delivery constraints. Reports over the weekend are showing that online Retailers have not had the same growth as they have seen in recent years, sealing their fate for a lower than expected holiday season.

Volatility remains high …

The CBOE Volatility Index (VIX) remains high heading into the end of 2007. The VIX is considered the investors “fear gauge”. When it is high, investors have greater fear of a falling market, and when it is low, investors have little fear that the markets will fall.

Since the start of the recent Bull market in 2003, the VIX indicator has slowly been trending in a mild downwards trend. This was until early 2007. Since then, we have seen a major change in characteristics of the VIX, as has been reflected in the broader market averages.

While the VIX remains in this volatile state, trading at high levels, investors need to remain extremely cautious.

Index Analysis …

On the medium-term, the markets appear to be maintaining their medium-term trends. However, the retracement of the markets this week has formed Lower High points, and could be the pivot point for lower markets in the coming weeks.

Through 2007, the market corrections experienced in Feb/Mar, July/Aug, and Oct/Nov have all held at roughly the same levels. For the S&P500 index, this has been at approximately 1,425, while the Russell2000 index has held at roughly 750 points.

However, after only mild buyer influence has lifted the markets from these support levels recently, a Bearish reversal point has formed Lower High points, which could technically lead to downward trend.

Support levels will again be tested this coming week. If broken, the combination of Lower High points and a Lower Low point defines a downwards trend. In which case, Bearish strategies should dominate.

The week ahead …

In the week before Christmas, there are a number of market influences likely to affect direction. There are some key economic reports scheduled for release, Energy prices appear to be on the rise, while the Financial Fallout is not likely to be completely over yet.

Monday – Don’t be surprised to see some relief buying. Retail stocks might suffer through the week due to lower sales reports. No key economic reports.

Tuesday – Housing Starts and Building Permits data scheduled for release before market open. Market reaction is likely to dictate direction for the day. Not expecting a strong report to influence buying.

Wednesday – No key economic reports.

Thursday – GDP (final) figures for 3^rd Quarter. Not a great influence as it is confirming previous data. However, the Chain Deflator data could influence opinions on Inflationary pressures. Again, not expecting bullish activity from this data.

Friday – Personal Income and Spending, and more importantly, Core PCE Inflation data. Both scheduled for release before market open, and will give precedence for the days’ activity. Expecting negative market reaction at this stage. Last trading day for December option contracts.

FMR Analysts Outlook …

The week ahead appears to show reasonable potential for further Bearish market activity. From a Technical perspective, buyers had failed to lift the major averages significantly from their long-term supports, and as concerns for Christmas Shopping and the outlook that the FOMC may not lower rates again, we could find that investors will look to exit positions ahead of the New Year.

The economic data scheduled for release on Tuesday and Friday could be the only key for the Bulls. Depending on the results and market reaction, the Bulls will be banking on this data to help the major averages hold support, and possibly find sufficient buying strength to rally into the New Year.

Uncertainty for Financial stocks also remains a major influence. It seems each week we are on edge waiting for another “surprise” announcement that will cause investors to send Financials lower.

Certainly these share prices are at attractive lows for the long-term investor, which is the only hope they have at this point in time. We have no doubt that despite potential Government bailouts, Central Bank intervention and investment capital from all over the world, the Financial industry is highly likely to continue divulging surprises over the coming months.

Energy is also going to continue to plague the markets. Crude prices do not seem to be relinquishing their all time high prices. They might struggle to get through $100 a barrel, however, do not expect them to be trading below $85 heading into 2008, let alone any lower.

FMR Strategy Analysis …

Traders: Bear strategies dominate analysis at the moment, particularly due to the lower high point formed on the major averages. Probability for continued downward market activity is good to high.

Investors: Protection strategies should already have been adopted, as discussed in early November. To adopt protection strategies now could be quite costly. With a good to high potential that the markets will continue to fall, some investors may look to exit positions. Due to the short-term market outlook, and the reasonable potential that 2008 will result in a Bear market, investing into new positions is not recommended at this stage, unless the investor also adopts protection strategies.

Option Writers: This is the last week for the December option contracts. Evaluate your positions for the potential to be Exercised, and take action if you do not want your position Assigned.

Should the Bears continue to dominate the markets and the major averages breach their support levels, Option Writers should switch to Covered Put positions. We recommend ITM Covered Put writing at this stage, in an effort to manage risk.

Naked Put positions are VERY HIGH RISK at this stage. Covered Calls are High Risk, and should only be entered by investors with experience.

US Market Report – week ending 7th December 2007

2007-12-09T18:31:00.000+10:00

By Matthew Brown

President Bush steps in with a plan to alleviate further risks to the Mortgage lending industry, helping the markets to rally for the 2^nd week in a row. Investors, however, are wary ahead of Tuesday’s FOMC policy statement on Interest Rates.

It was a positive week for investors, who saw renewed buyer interest entering the markets midway through the week. This caused a rally that has helped the major averages maintain a support level, and defined a new medium-term sideways trend.

Since 2 market tops had formed in July and October, there were grave fears that a Bear market would be confirmed. Two slightly lower low points have followed and almost triggered panic selling, however, as we have presented in the above weekly chart, a Sideways (Consolidation) trend is now established.

Using the Russell2000 index as our benchmark, we have identified a Consolidation pattern at the top of a long-term Bull market. This suggests we should expect further short-term upward activity, however, the probability of the markets continuing in a strong upwards movement through resistance (850 points on the Russell2000), is extremely low.

Helping to confirm this activity is the S&P500 index, which is heavily weighted with Financial stocks – the cause of the recent market negativity. It too has held its support level and is now trading in a sideways trading range.

The CBOE Volatility Index (VIX) has fallen in relation to the easing of “investor fears”. The VIX is considered a gauge of investor sentiment, and as it falls it suggests investors are more optimistic for the markets. Since early November, the VIX has retraced from long-term highs and is now trading mid-range between recent highs and lows. Despite the easing of this index, investors should still remain cautious as it is not yet trading at levels that would suggest Bullish markets are likely.

Bears are out of hibernation for what looks to be a hot winter …

Many analysts and economists are talking of 2008 as being a Bearish year. There is much to support this outlook, even despite the recent Subprime Credit lending problems:

1) FOMC have been lowering rates to ward off a Recession

2) Housing market has been negative for almost 2 years

3) USD continues to struggle against international currencies

4) Energy prices are trading at all time highs, and (of course)

5) A collapse of the Subprime lending industry.

Inflation has been the greatest concern over the last 12 to 24 months, and for this reason, the Federal Reserve has been carefully monitoring economic data. In more recent times, this has led to a lowering of Interest Rates in an effort to help prop up the economy.

The Federal Open Market Committee (FOMC) will again be meeting this coming week (the final time this year), to discuss Interest Rates. The consensus is that there will be a quarter percent decrease in Interest Rates.

FMR Analysts agree with the general outlook and expect a lowering of rates on Tuesday. Should the FOMC keep rates steady, look for a disappointed market to drive stocks lower.

Christmas shoppers are not coming in from the cold …

Thanksgiving Day marks the start of the Christmas shopping period. From all accounts, this years’ Christmas shopping is shaping up to be quite poor. It was the same activity last year (and the year before), where a strong buyer drive just before Christmas day lifted figures. However, Retail stocks were only saved by a strong post-Christmas sales period.

Could this year be shaping up much the same?

Shoppers are likely to have been hurt by higher Interest Rates through 2006/07, sky-rocketing fuel prices, and increased Credit risks with housing and personal debt. These are strong arguments for a weak Retail season – which is the first sign of a Bear market.

The US economy is strongly represented by Consumer Spending. In fact, 65% of the economy is said to be made up by consumer spending. Already we have the FOMC lowering interest rates to instigate spending, so they must be very concerned that a Recession may be just around the corner.

In support of the cyclical “invest in retail” theory, we have seen some strong bullish activity in the last few weeks on the Merrill Lynch Retail Holders ETF (Exchange Traded Fund).

This ETF (code: RTH) has rallied from a long-term low, and is attempting to break the downwards trend that began in July earlier this year. Should Christmas shoppers find the extra money to spend on presents, there is potential that Retail stocks will again be bought up in the annual cyclical rally.

FMR Analysts believes that this year is probably not the year to put “all your presents in the one stocking”, however. Despite the reasonable potential for a short-term rally in this industry, results of Christmas spending is not likely to be available until later in January, and there are just too many negative factors that are likely to influence spending.

Focus on Economic data …

It is a huge week ahead for investors, with numerous key pieces of economic data scheduled for release. Last week, investors had turned their focus to the Unemployment data scheduled for release pre-market Friday.

The annual Unemployment rate has held steady at 4.7%, with a 0.8% annual rate of increase in payrolls. This indicates that the labor market remains quite steady. With many economists and analysts talking of a Bearish year ahead, possibly even a Recession, the Unemployment data was a shining light for investors.

But next week we will see more key economic indicators, and the FOMC releasing their Monetary Policy statement. This latter announcement will be made on Tuesday at 2.15pm EST, and is likely to see the markets somewhat Neutral on Monday.

To start the week, we have the Pending Home Sales figures at 10am on Monday.

Export/Import Prices and Trade Balance figures will be released before market open Wednesday at 8.30am EST, followed by the Treasury Budget later in the day at 2pm.
On Thursday, Retail Sales and PPI (Producers Price Index) data will be released at 8.30am.
And, on Friday CPI (Consumer Price Index) data will be released, also at 8.30am.

This last piece of economic data is one of the key reports that defines the state of the economy. If CPI is rising, then this means Inflation is increasing. The FOMC needs to see that their recent interest rate drops have had an affect on the economy, slowing Inflation or at least having it hold steady.

FMR Analysts Outlook …

Due to the FOMC meeting on Tuesday, we are expecting Monday to be a relatively quiet day of trading. This was the reason for last Friday’s “non-activity”, and is likely to flow through to Monday as there has been very little news over the weekend.

There is a high probability the FOMC will lower rates again on Tuesday, which the markets would find positive. Should the FOMC keep rates steady, this might panic investors into selling stocks.

In the case of rates remaining steady, this would set the tone heading into the rest of the week. Investors would then be looking towards Friday’s CPI data for any relief.

The markets have the potential to swing in either direction this week. There is a higher probability that it will be a Bullish week for investors, but only if Interest Rates are lowered on Tuesday and that the accompanying statement does not incite investor fears.

FMR Strategy Analysis …

Traders: Bears failed to trigger reversal patterns through the last week, and we now have a short-term rally breaking the previous trend. With a reasonable probability that buyers will be present again this week, now would be the time to enter into short-term Bullish trades.

Investors: The markets have a defined Consolidation pattern at the top of a long-term Bullish trend. If your outlook for 2008 is inline with economists, and you think there is a reasonable potential for a Bear market next year, this rally could present the opportunity to exit stock positions. At the very least, this will help lower the general prices of Put options, and so investors should be looking at this rally as an opportunity to instigate protection strategies.

Due to the low probability that these markets will break through resistance on the medium-term Sideways trends, we would not suggest investing into new stock positions at this stage.

Option Writers: Only 2 weeks until expiration of December contracts. ITM, or Deep ITM Covered Call positions for January might be considered, however, there is still high risk that a Bear market could occur. OTM Covered Call positions are relatively high risk, while Naked Put positions are high risk. Only experienced writers should consider Naked Puts at this stage.

US Market Report – week ending 30th November 2007

2007-12-02T18:33:00.000+10:00

By Matthew Brown

Buyer demand returned to the markets following the Thanksgiving Day holiday weekend. Investors bought up oversold stock on expectations that the Federal Reserve will lower Interest Rates for a third time. The Financial sector led the recovery, while lower Crude oil prices offered additional encouragement.

Investors found cause to accumulate stock over the last week, giving the major averages a much sought after rally. In particular, Tuesday and Wednesdays activity was a strong attempt to break the downward trend that has persisted for more than a month.

The Russell2000 index, which represents the broader market, gained more than 4.6% over those 2 trading days. The NASDAQ index also gained more than 4% midweek, while the S&P500 index gained more than 5% from Tuesday to Friday, and the DOW Jones index fell just short of 5%.

Buyer demand slowed into the end of the week, however, led with some selling pressure in leading Technology stocks on Friday. This means we are currently at a “pivotal point” for medium-term trend definition.

What we have at the moment is a medium-term downward trend, with a strong short-term rally. The short-term rally is not a “break of trend”, at this stage. And with the weak buyer activity into the end of the week, could lead to a Bearish reversal that continues the medium-term downwards trend.

If, however, strong buyer activity continues into the beginning of the next week, this might lead to a break of the medium-term trend.

Since the peak in early October, we have seen the markets retrace 10%, only finding some buyer support in the last week of trading. If buyers persist, than it is likely we may find the markets holding onto a long-term sideways trading range. This is because investors have proven that they aren’t willing to push the markets higher than the levels found in early October, and possibly have found a lower level in which they are not willing to drive the markets any lower.

Strong selling pressure at any stage in the coming week would more than likely form a Bearish reversal point, causing a lower high point to form, and therefore, a continuation to the medium-term downwards trend. In which case, investors need to look towards the potential that a lower point may be reached on the major averages.

Financial stocks finally find some relief …

After nearly 5-months of retracing due to the implications of the Subprime lending market, Financial stocks finally found some relief over the last week, recovering more than 5% on strong buyer accumulation.

Using the Financial Select Sector SPDR index (code: XLF) as our benchmark, we have seen this index lose more than 26% since early June. This sector has been the major cause for the markets slumping twice in the last 6-months, but was also the influence behind the rally this week.

A major stake in global leader C (Citigroup) was announced on Tuesday, with the Abu Dhabi Investment Authority stating they would be investing $7.5 billion to acquire 4.9% of the company.

Other notable Financial stocks in the news this week included FRE, FNM and BCS. All three found strong buyer accumulation on positive announcements that has led investors to perceive that the worst of the “Credit Crunch” may be over.

Financial stocks also found buyer activity on expectations that Interest Rates may be cut. This is a sentimental factor, however, which incites caution at this stage.

FOMC meets on December 11 …

After lowering base Interest Rates a total of ¾ of a percent at the last 2 FOMC (Federal Open Market Committee) meetings, investors are expecting a further lowering of rates on December 11.

Federal Reserve Chairman Ben Bernanke spoke at a Charlotte Chamber of Commerce meeting, hinting that another lowering of rates might be in order sometime soon. Key points of the speech included:

A worsening Credit Crunch, deepening housing slump, and rising energy prices are likely to create headwinds for consumers in the months ahead
Expects consumer spending to continue to grow, with the economy able to withstand falling into a recession
However, odds of a recession have increased
The FOMC will need to remain exceptionally alert and flexible

The economic outlook has been importantly affected over the last month by renewed turbulence in financial markets. These developments have resulted in further tightening in financial conditions

The FOMC’s 2^nd in command had also addressed the potential that interest rates might be lowered. On Tuesday, Donald Kohn suggested the FOMC might lower rates due to Wall Street’s reaction to the problems in the housing and credit markets.

With the 2 top leaders of the FOMC suggesting a lowering of interest rates, investors flocked to oversold stocks.

Economics is the key word …

It was an impressive week of economic announcements. Aside from the comments from Bernanke and Kohn, there was the release of data for Consumer Confidence, Existing Home Sales, Durable Orders, the Fed’s Beige Book, GDP Preliminary, New Home Sales, Personal Income and Spending, and the Core PCE Inflation indicator.

The Core PCE Inflation indicator is one of the key pieces of data that the Fed reviews to determine Monetary Policy. It was up 0.2% in October, which is a 1.9% increase year over year. The Fed attempts to keep this figure between 1.0 and 2.0%, so at this stage, this does not support the potential of an interest rate decrease.

But it was the Fed Reserves Beige Book that most investors were keen to read. The message from the late October FOMC meeting was that the economy was moving at a “slower pace”, which did not tell the markets anything new. However, a slower economy could help influence the Fed to lower Interest Rates, so investors continued to buy oversold stocks on the news.

Next week will the release of the Unemployment report on Friday before market open. This is one of the key economic indicators to measure the strength of the economy, and will be closely watched by many investors.

FMR Analysts Outlook …

There is no denying that this last week was a strong buyer reaction. But there are 2 factors that are continuing to support the current medium-term downwards trend: 1) the slowing buyer activity heading into the end of the week, and 2) investor fears that the economy is slowing significantly and could be a Bearish market in 2008.

Our biggest concern is that the buyer activity experienced in the last week may just have been Short Sellers covering their positions, and that this will find sellers coming back to the markets on negative news through the coming week.

Due to trend definition on the major averages, FMR Analysts will maintain a medium-term downwards trend outlook. Until such time as we have signs of a break in trend. The short-term trend is Bullish, against the medium-term trend, and is a conflicting signal.

The coming week is pivotal for medium-term trend definition. There is potential the markets could trade up or down, so investors will need to remain vigilant.

Maintain a Bearish outlook for now, but do not be surprised if there is further buyer activity.

FMR Strategy Analysis …

Traders: Look for Bearish opportunities on a short-term reversal of the major averages.

Investors: Hold positions, but do not accumulate stock positions just yet. The current rally does not suggest a Bull market at this stage.

Option Writers: There are 3-weeks until December expiration. Still high risk in entering new positions, and with market direction suspect, difficult to choose positions. Volatility is falling, which is positive for writers. Therefore, Call writers may be able to enter into lower risk positions.

US Market Report – week ending 23rd November 2007

2007-11-25T18:36:00.000+10:00

By Matthew Brown

A shortened trading week gave investors a break from recent Bearish momentum. The Financial sector has dominated the market slide, yet again, while investors were spooked by the Federal Reserves apparent “indecision” when Interest Rates were recently lowered.

FMR Analysts had expected a mild recovery early last week, followed by selling activity heading into the Thanksgiving holiday Thursday. The actual market activity for the week was the reverse of our expectations, however, was still dominated by sellers overall.

The Bear trend appears to be relatively entrenched, with the S&P500 and DOW Jones indexes having retraced 10% since the high in October, while the Russell2000 index has retraced more than 13% over the same time frame.

We now find the major averages trading at their medium-term low levels, with the question of “will they hold here” foremost on investor minds!

A mild recovery during a half day of trading Friday denoted a small level of “bargain hunting” that might lead to a greater sense of the markets being oversold for now. But readers must not forget that many major market players would not have been participating during Friday’s activity as they enjoyed an extended long weekend.

For now, with current short-term trends denoting selling pressure, investors should maintain bearish views in the markets until a change is otherwise confirmed.

Economic data not as week as first expected …

Investors started the week with Housing data. This turbulent sector has suffered from a housing slump that started more than 18-months prior, but has been fueled by the Subprime Credit Crunch that has rocked the broader market in recent months.

Mixed data for Housing on Tuesday saw the markets wavering. Housing starts increased 3% in October, however, Building Permits declined 6.6%, negating any positive activity that could have led to a market rally.

Prior to this, the National Association of Home Builders had released their confidence index on Monday. It reported the lowest level since 1985, when this report was first recorded.

The negative confidence data and the heavy decline in Building Permits certainly far outweighs the Housing Start data. Especially when an increase in Housing Starts is a cyclical increase due to the end of Winter in the US. As the weather gets warmer, more Housing Starts will typically occur.

But investor focus was solely on the Federal Open Market Committees (FOMC) release of their October Monetary Policy report Tuesday afternoon.

Following 2 decreases to Interest Rates, pressure on mortgages had eased and investors were looking forward to some support from the FOMC to justify the recent lowering of rates, and the potential that another decline might occur in coming months.

This was clearly negated when it was found that the FOMC stated they were “unsure” whether to lower rates recently. Investors were confused by this, and left wondering what their next move would be.

At the same time, however, the FOMC decreased their outlook for growth of the economy in 2008, so this should lead to the potential of a lowering of interest rates early in 2008. For the time being, don’t count on another interest rate decrease for 2007, however.

Commodities spike upwards while the USD continues to fall …

Both Crude Oil and Gold prices pushed upwards over the last week, following some mild profit taking the week before. Precious metals (such as Gold and Platinum) continue to trade at high levels, however, other metals are down on their 12-month highs.

The cost of Crude and Gold, however, will have the major impact on the US economy. As the largest consumer of Crude around the world, the US military and population in general, will certainly be feeling the pinch of higher base prices. The commodity rallied back towards $100 a barrel this week and looks again to be making an attempt to breach this level.

There is no doubt that this is likely to put pressure on the economy if it continues trading higher. There are concerns that this might put added pressure back onto inflation, as it will lead to an increase in prices of most goods and services around the country (and the world), fuelling the “global inflation” concerns that many economists have been discussing for some time now.

Hurting the US economy at the same time has been the continue slide of the US dollar. It is trading at long-term lows and not showing any signs of the potential to recover. While the Fed Reserve lowers Interest Rates, there is very little incentive for investors to buy the US dollar.

At the same time, statements from organizations such as OPEC (Organization of Petroleum Exporting Countries) where they are investigating the potential to change their base measurement from the US dollar to the Euro (or a mix of currencies), could lead to the end of the USD global domination.

A huge week ahead for Economic reporting …

Ready to create more volatility for investors is a large number of key economic reports scheduled for release in the coming week:

Consumer Confidence: 10am Tuesday 27^th
Durable Orders: 8.30am Wednesday 28^th
Existing Home Sales: 10am Wednesday 28^th
Fed Reserves Beige Book: 2pm Wednesday 28^th
GDP Preliminary data: 8.30am Thursday 29^th
New Home Sales: 10am Thursday 29^th
Personal Income and Spending: 8.30am Friday 30^th
Core PCE Inflation: 8.30am Friday 30^th
Construction Spending: 10am Friday 30^th

All have the potential to incite volatility into the markets, and all will be closely watched by most market participants.

Volatility has steadied, but not down and out …

A revision of the CBOE Volatility Index (VIX) shows us that it has slowed over the last week, steadying at high levels above 25 points.

The VIX is referred to as the “Investor Fear Gauge”, showing when the markets are afraid there may be strong violent movements. It works opposite to a market index such as the DOW Jones or S&P500 indexes. When it is high, investor fear is high, and this typically leads to bearish market activity. When it is low, investor fear is low, and this can usually find steady upwards trending markets.

For the last few weeks, the VIX has been trading above 25 points, reaching a high above 31 points on the 12^th of November. To put this into perspective, the index traded up to 37 points in August when the markets reacted severely to the Subprime news. These are the highest levels this indicator has traded in the last 4 years, and has not been above these levels since the 2000 Tech Wreck which triggered a 3 year Bear market.

Due to this evaluation, investors should remain cautious of further potential of the markets retracing.

FMR Analysts Outlook …

Despite a mild rally at the end of the week, there are no signs that the markets have found sufficient buyer demand to look at reversing the downwards trend. Even if there were a market rally early in the week, investors should remain bearish until there is a confirmation of change in trend.

Bulls have one potential sign at the moment, and that is that the major averages are trading at support levels after a 10% decline. Many investors might find this to be a good “accumulation” point for bargains. However, there has been a great deal more negative backlash from the Subprime credit crunch, so investors need to be aware.

Should the markets continue to decline, a move of more than 10% on the major averages will almost certainly denote a “Bear Market”. So it is now crunch time!

The S&P500 index is only just holding onto a mild gain for the year so far, while the Russell2000 index is now in a loss. Technology stocks have remained the strongest sector, but if the broader economy moves towards Recession (yes the big R word!), will this take the wind from out of their sails? Most likely yes!

For the time being, however, investors need to maintain the current Bearish trend as the predominant influence, only changing this opinion when we physically have proof of a changing trend.

FMR Strategy Analysis …

Trading: Short-term traders should be trading Bearish strategies at the moment. Should a short-term rally occur, look for strong reversal patterns as the trigger to enter new Bearish positions.

Investing: Investors should not be buying stock right now. There are no signals that the Bulls are willing to re-enter the markets with enough gusto to push an upwards rally. Protection strategies should already have been adopted a few weeks ago (as per the FMR weekly report). Current positions could be held, though investors need to consider the potential that further downwards activity may present itself over coming months.

Option Writing: Covered Call writers could still enter positions, however, only if aware that there is still potential that stock prices will retrace. Naked Put writers should be extremely cautious, and not enter into positions for now. There are 4 weeks left for the December07 options, which is ideal for entry into new positions. However, the markets hold a higher risk at the moment, especially for Put writers. Writers could consider ITM Covered Put writing strategies.

US Market Report – week ending 16th November 2007

2007-11-18T18:38:00.000+10:00

By Matthew Brown

Although there was some wild activity between Bulls and Bears over the last week, neither confidently grabbed control of the markets. The Financial sector continues to feel the pinch over credit market concerns, while Inflationary pressures remain in check.

Investors have been 100% focussed on Financial stocks over recent weeks. Following the market retracement in July/August on the realization that Subprime lending had ground borrowing between banks to a halt, many investors had felt the worst had been released. However, there has been a clear secondary reaction from investors since October.

The markets are not longer supporting a Bullish trend. Resistance in the major averages and strong selling volume confirm the end to a 4 year upwards trend. The focus now should be whether or not the new trend will become a sideways consolidation or completely reverse into a downwards trend.

With the markets having retraced over the last 6-weeks, they are now testing their medium-term lows. If a sideways consolidation market were to form, we would see the markets holding their medium-term lows, potentially rallying on the short-term, sometime over the next 2 weeks.

But a continuation of selling activity will form a “lower low” level, and this denotes the potential of a change in trend.

Using the Russell2000 index as a benchmark for overall performance, we will evaluate this further …

On a daily chart, the Russell2000 shows us a short-term downwards trend over the last few weeks. It has retraced from resistance of 850 points, and is now trading above support of 750 points. It has retraced more than 10% in just under a month.

The weekly chart shows us a larger consolidation pattern since May/June. Following the retracement in July, the market held the support at 750 points, rallied to the previous high point finding resistance again at 850 points, before recently retracing back to the support. The market activity for 2007 clearly shows a consolidation pattern on this chart.

Both the S&P500 and DOW Jones Industrial Average both show similar market patterns. The NASDAQ index, however, still maintains a long-term Bullish trend. It has retraced over the last 2 weeks, however, is not finding resistance on the upward legs, nor is it retracing back to previous low points.

Economic data confirms the economy is not growing at previous rates ….

Ideally, this is exactly what the Federal Reserve wants. For the economy to slow its rate of growth, and ease the pressure of inflation. Especially during a period where there are concerns that the economy could slip into a Recession through 2008.

Over the last week, we had the release of key economic data through the PPI (Primary Price Index) and CPI (Consumer Price Index). Both of these figures give the Fed Reserve a reasonable measurement on inflation and the affect their recent interest rate cuts are having on consumer spending.

PPI data was unchanged from October coming in at 0.1%. The markets had been expecting a slight increase to 0.2%. While CPI came in at expectations with a slight rise. Core CPI (which excludes food and energy) rose 0.2% and total CPI rose 0.3%. Annual CPI for the year remains relatively low (compared to previous years during a growth economy), at 2.2%.

Next week we will have 2 sectors to focus on:

1) Housing, and

2) FOMC minutes

On Tuesday the 20^th, the release of Building Permits and Housing Starts figures before market open will pave the way for buyers or sellers to enter the markets. These figures are all tied in with the recent Subprime Credit Crunch and will either spook investors or support buyer accumulation.

Later in the day on the 20^th, the Federal Open Market Committee (FOMC) will release the minutes from their October 31 meeting on Interest Rates. The content of these minutes will also help support buyers or sellers due to the impact this is expected to have over the coming months.

Financial stocks in the news …

As we had mentioned in the introduction, Financial stocks have been the key focus of investors over the last week. The fallout from the Subprime Credit Crunch is the main cause of the nervousness accompanying this focus.

To start the week, brokerage firm E-trade (ETFC) plunged 59% as the company announced the 4^th quarter would experience further write-downs and that their previous 2007 earnings outlook should not longer be considered.

From the June high to this weeks low, ETFC had lost more than 87% in value. It recovered through the week to close at meagre $5.44 per share.

Research firm Citigroup (C ) downgraded ETFC from Hold to Sell stating the company could potentially fall into a Bankruptcy filing.

While ETFC was sky-diving without a parachute, the larger Financial stocks were actually finding some buyer accumulation. MER, GS, WM, C, and LEH (just to name a few), helped lift the Financial sector early in the week. However, almost the entire sector gave back those early gains before the closing bell on Friday.

News from across the Atlantic helped convince investors to take profits from the Financial sector. London based Barclays announced a $2.7 billion write-off, while it was reported that UBS would exceed a $7 billion write-off.

At the same time, the WFC CEO stated “We have not seen a nationwide decline in housing like this since the Great Depression. I don’t think we’re in the ninth innings of unwinding this.”

And to end the week, economists from Research Firm Goldman Sachs (GS) suggested that losses following the Subprime fallout could reach $2 trillion. This further drove the sector downwards and left investors feeling deflated for the week.

The Financial Sector Spdr ETF (Exchange Traded Fund) index has held relatively steady around 30 points. Last week, we had identified this level as a crucial indication as to the potential for a continued downwards trend. Ideally, a short-term rally culminating in a Bearish reversal would give sellers added incentive to drive this sector down further.

Not all looks rosy for the US markets …

Along with the falling markets, the US dollar has been steadily retracing since late 2005. It has retraced more than 20% in that time and is not showing any signs of slowing.

Over the weekend, an announcement from the Iranian President Mahmoud Ahmadinejad suggested that OPEC members (Organization of Petroleum Exporting Countries), have expressed an interest in converting their cash reserves into a currency other than the “depreciating US dollar”.

This statement may be more political than progressive, as many readers will be aware of the ongoing tensions between Iran and the United States. However, if there is any truth to the statement, this could have a major impact on the US dollar.

The US dollar is used as a major benchmark for many commodities around the world. If it were to start losing its grip as the benchmark currency, it is highly likely this would have a major negative impact on the economy and subsequently the markets.

FMR Analysts Outlook …

Our outlook over the last few weeks has been Bearish. Short-term analysis suggests there is no slowing of seller momentum at the moment, and with economic data on Housing scheduled for the coming week, the Bears might just get fuel to continue driving the markets down.

However, with economic data showing that growth is not as strong as it had been earlier in the year, we might find that investors could perceive these markets to be at a good accumulation point.

The bottom line is whether or not a sideways consolidation will form (holding the support), or whether investors will turn the short-term downwards trend into a medium-term trend. Neither could be confidently predicted at this stage.

For this reason, the coming week is pivotal in defining the medium-term trend heading into Christmas and the New Year.

Our expectations are that we might find another mild market rally early in the week. Depending on the reactions of Tuesdays economic data and FOMC minutes will determine whether or not a rally will ensue through to the end of the week.

If buyers are present this week, we could expect a mild rally but not one that would result in a Bullish market holding for an extended period of time. If sellers dominate, we would expect continue panic activity to fuel a deeper medium-term downwards trend.

FMR Strategy Analysis …

This week is pivotal for medium-term market activity heading into the end of the year.

Bulls: It would appear the Bull market of the last 4 years is at an end.

Bears: A short-term downwards trend could build into a medium-term downwards trend, however, the major averages are now trading on support levels. Monitor for a week market rally to reverse, and form the next downwards leg.

Investors: We have been recommending Protection strategies on stock positions for the last month. If investors are not already in protection strategies, they are likely to have suffered depreciation in the value of their portfolios. It will be expensive to enter into protection strategies at the moment, but on any short-term market rallies, look to hedge positions/portfolio.

Traders: With the potential of the markets holding support, a short-term directional movement could swing in either direction. There is more probability that sellers will continue to influence the market, so short-term traders should maintain this focus until we have a change in trend.

Option Writers: November options Expired over the weekend. For Naked Put traders, you should consider less exposure in the markets, possibly even remaining sidelined. If you are confident there is a strong potential the markets may hold their current levels, look for entry into deep OTM (Out of The Money) positions. Lower return = lower risk! Covered Call writers should also be cautious, looking to enter into ITM (In The Money) positions. If the markets were to break downwards, this would have a negative impact on any Covered Call position. If considering Covered Call positions, only hold a medium-term outlook, looking to invest for the next month or two.

US Market Report – week ending 9th November 2007

2007-11-11T18:41:00.000+10:00

By Matthew Brown

A market “Correction”, led by the Financial sector has the S&P500 index down 8% from it’s recent high, the Russell2000 index down more than 11%, and the CBOE VIX (Volatility index), trading back up towards its high levels from August. Does this mean more market negativity to come?

Over the last few weeks, FMR Analysts have been reporting that there has been a reasonable potential for continued Bearish market activity. We have warned investors to enter protection strategies, close out of positions if they are worried, and to limit option writing positions (in particular naked put option writing).

The markets over the last week have proven the level of fear encompassing the current market conditions, with the major averages slipping into new 3-month lows, and even the stalwart Technology leaders such as AAPL, GOOG and MSFT have fallen to profit taking.

Will the Bears hibernate this winter? …

Although we do not yet have a defined Bear market, we certainly have a slowing to the Bull market that started in early 2003.

The major averages are all showing us resistance at higher levels. The recent high points achieved on the S&P500 (1,576) and Russell2000 (852) indexes, stalled at the previous high points from June/July. This suggests that buyer demand at these higher levels is weak at best, with no real desire to want to buy stocks up.

As many readers are aware, the Financial sector has been the leading cause of this market pullback. An evaluation of the Financial sector ETF (Exchange Traded Fund – similar to an index), shows the impact.

XLF – the Financial Sector Select SPDR (index), has retraced more than 20% since early June. It is now trading at a 2-year low, and by all reports, is not showing much potential of stabilizing any time soon.

At the very least, it is almost time to say that the 4 year Bull market we have experienced since 2003, could very well be at an end!

Interest Rates have been lowered twice in the last 2 months, in an effort to avert a Recession. If the powers that be thought the economy might slip into a Recession, even with the lowering of Interest Rates, will this still prevent the markets from relieving some of the gains made over recent years?

On the one hand, we have lower Interest Rates attempting to influence continued spending. On the other, we have Crude oil and Gold prices trading at record highs, a market that does not seem to have the buyer strength to continue trending upwards, and investors who fear a Recession.

FMR Analysts see very little reason for the markets to resume their previous Bullish direction based on the current data, with a higher probability that the Bears will be active for the Winter. Maybe a touch of “climate change” is starting to affect the market seasons!

Inflation data scheduled this week …

The true test of investors’ faith will come with the release of the PPI (Primary Price Index) before market open Wednesday, and the CPI (Consumer Price Index) before market open Thursday.

Both sets of data indicate whether Inflation is pushing the prices of goods at a Wholesale level (Primary) and at the Consumer level. Investors will be looking for an easing on Inflationary pressures to support the cause of lowering Interest Rates.

If we were to find that Inflation continued to rise, or at least come in stronger than expected, then this would be a mixed signal against the lower Interest Rates experienced recently.

As previously mentioned, Interest Rates were lowered to help push the economy along in light of the Credit Crunch felt in the Financial sector. But if Inflation is continuing to rise, the Federal Reserve will reach a point where they have no choice but to lift Interest Rates again.

The economy is balancing on a very fine line at the moment. Investors’ nerves hinge on whether there will be continued growth that will drive stock prices up, or if a slowing economy will stunt the growth of the markets, possibly even leading to a bearish activity.

Volatility is back …

In early October, we had seen the CBOE Volatility Index (VIX) retracing back from long-term highs. But now the “investor fear gauge” has rallied back to the previous highs, suggesting investors are expecting further market negativity.

The VIX is used as a guideline on investor fear. When it is trading at higher levels, there is more volatility, typically resulting in greater potential for a market retracement. At lower levels, the VIX represents a steady market.

Some volatility is needed in the markets. It helps the short-term trader profit from fluctuations, causing stock prices to rise and fall, and subsequently option writers can gain higher premiums. However, extreme volatility is a worrying sign for all market participants.

At the current levels, the VIX indicator is offering signs that further bearish activity is likely to persist.

Key announcements from the last week …

Following are a list of the key announcements that influenced trading activity:

Citigroup (C ) announces they “anticipate recording a write-down of approximately $8 billion to $11 billion for its 4^th quarter. Fears of more write-downs in the Financial sector, with the 3^rd quarter not marking the bottom for the financial sector. C shares trade more than 5 times their daily average on Monday 5^th November.
WM accused by New York Attorney General of pressuring real estate appraisers to inflate appraisal values
FNM and FRE subpoenaed in real estate appraisal investigation, over information on mortgages bought from WM.
Royal Bank of Scotland report suggests losses related to credit crisis could top $250 billion.
GM reported 3^rd quarter loss of $39 billion, after writing down the value of future tax benefits. GM lost $2.80 per share, fuelled by mortgage related losses in GMAC
US dollar continues to weaken against most global currencies
Crude Oil hits record highs of $98.10 a barrel
Gold peaks at $847.50 an ounce

All in all, not much to incite the Bulls to enter the ring, and subsequently, there was heavy selling pressure throughout the week.

FMR Analysts Outlook …

We continue to maintain a “Bearish Expectation” as investors experience the 2^nd major market retracement in 4-months.

The major averages have retraced to their previous lows, which we need to monitor. If they stabilize around current levels, we may find the markets are shifting into a Consolidation pattern at the top of the Bull market. If selling pressure persists through the coming week, then we have potential for a Bear market to form.

Earnings season is all but over. Majority of the leading companies have reported, though there are still a large number yet to release details. Therefore, investor focus will return to market Economics, and with PPI and CPI data scheduled for release this week, investors will nervously wait for incite into the strength of the economy.

It will be lucky if we do not get further news regarding the impact of the credit crunch to the Financial sector. If the week goes by and there are no announcements, then this could find some buyer influence from “bottom fishers” – those who buy up stock on market dips.

But be aware, a week without any major market announcements on the impact of the credit crunch is likely to find a greater reaction from investors at a later date.

Be prepared for further selling pressures, but also expect buyer relief. If the latter occurs, further selling pressure is likely to persist in coming weeks.

FMR Strategy Analysis …

Bears are dominating the markets, and have formed short-term trends. But medium/long-term direction is unconfirmed.

Bulls: For the time being, there are no signs for Bulls to be considering entry into the current markets.

Bears: Bears dominate, with a high probability of continued downwards activity. The coming week will be crucial as the major averages trade on support. Do not be surprised if we have a neutral week, maybe with some buying activity. If so, monitor for a return of the Bears to confirm next leg of trend.

Investors: Continue to enter into protection strategies for stock positions. Put premiums will be slightly higher now that the markets have continued to retrace. Do not “accumulate” stock at this stage, as there have been no signs of slowing seller pressure.

Traders: Continue to consider Bearish reversal alerts for either CFD or Option traders. Look to enter positions if the markets continue to show bearish activity.

Option Writers: November options expiration approaches this weekend. Evaluate positions before market close Friday, and close written positions if you do not want to be exercised. Consider writing Call options (At The Money) against stock currently held, in an effort to lower average price paid. Do not enter into Naked Put positions at this stage, due to the high probability that further selling pressure will persist in the markets.

Weekly US Market Report – week ending 2nd November 2007

2007-11-04T18:43:00.000+10:00

By Matthew Brown

This week had it all: Interest Rate cuts, Crude Oil at record highs, panic selling on continued fears in the subprime fallout, key economic data and a plethora of earnings announcements. In the end, the Bears won the battle. But not convincingly!

The greatest fear for investors at the moment is that the markets have “topped out”, and that continued market growth has stagnated. There are numerous factors to support this statement. All of which culminated over the last week.

Firstly, a technical evaluation of the major averages. Using the Russell2000 index as a benchmark, we have a Lower High Point that formed on the 31^st of October. The previous high held resistance that had formed in May/June/July earlier in the year, suggesting the Bulls do not have the strength to continue driving the markets at the same growth we have seen over the last two years. This suggests there is potential for a technical downwards trend to form, so many analysts and traders will be carefully watching these markets for a downwards break.

Crude Oil is another major influence at the moment. It is trading at an all time record high just below $96 a barrel. Consumers have already been feeling the pinch at the pump, but this rise over the last two months is highly likely to have a negative affect on the consumer.

Currency has also played a major part. The US dollar has been spiralling downwards for nearly 2 years. For American importers, this is a negative fundamental with the cost of imports rising. Because the US economy is in a Trade Deficit, goods in general are likely to rise. Foreign debt, and the interest owed, also increases.

Finally, the fallout from the subprime credit crunch is continuing to be felt through the Financial sector (one of the most influential sectors fro the economy). Leading international financial institutions such as C, MER, and LEH as well as domestic Banking giants like BAC and WB have all suffered from serious selling pressures in recent months. There have been no signs of reprieve at this stage, with continued uncertainty towards the impact on company profitability.

But not all is doom and gloom ….

The Federal Open Market Committee (FOMC), who establish Monetary Policy for the US economy, decided to again lower Interest Rates. On Wednesday the announcement was made that both the Federal Funds and Discount rates would be lowered by a quarter percent each. This sets the former at 4.5% and the latter at 5%.

A lowering of interest rates means both the consumer and business have less to pay in interest. Such a move is made to help instigate spending within the economy. Because of the negative impact of the subprime credit crunch and the slowing Housing market, a lowering of rates has been a relief that is hoped to save the US economy from falling into a recession.

Investors bought up stock on Wednesday following the announcement, but not sufficiently to forget all their fears. Selling pressure had returned by Thursday trading.

Supporting bullish investors this week was economic data for GDP and Inflation. The Advanced GDP figures were released to show a relatively strong economy with an unexpected 3.9% rise. While inflationary data on GDP is holding a 0.8% annual rate. A higher read on the GDP deflator (inflation) would suggest the FOMC would need to raise rates to slow consumer spending.

Unemployment also remains at a long-term low of 4.7%. There was a strong increase in unemployment in October, which could be part of the fallout from the Financial sector, but this did not change the annual rate. The average work week remained steady, while the hourly rate only increased slightly. Not significantly to warrant influence on the broader economy.

In the coming week, there are very few scheduled economic reports that are likely to have a major impact on investor activity. Import/Export prices and the Trade Balance are scheduled for release before market open on Friday, however, it will be a relatively quiet week for economists.

Technology is the shining light …

Tech stocks have been the only beacon of light over the last 3 to 4 months. Despite the negative impact that Financial stocks, a slumping Housing market and booming Crude Oil prices have had, leading Tech stocks continue to drive into new record highs.

In particular, AAPL, BIDU, GOOG, and MSFT. These leading tech companies have released positive earnings reports and have been trending at quite sharp inclinations. The only concern here is that a collapse of the broader markets would see these stocks come tumbling down.

It would appear that investors have been flocking to these stocks in a “flight to quality”. Whereas in the past we would have seen investors buying up market stalwarts such as PG and XOM, they have been flocking to leading Tech stocks as if they were Blue Chips.

But maybe they just are!

The likes of AAPL and GOOG could very well be the Blue Chips of today. Following the 2000 Tech Wreck that triggered a market recession, AAPL, MSFT and GOOG have survived to be bigger, stronger, and much wiser.

Volatility increases ….

The falling markets on Thursday, and a couple of weeks ago on the 20^th anniversary of Black Friday, have caused the CBOE Volatility Index (VIX) to increase recently.

This key indicator suggests there is greater “fear” in the markets at the moment. The “investor fear gauge” is trading back up at medium term highs around 23 points after forming a support level around 17 points.

A rise above 25 points is likely to see the broader market forming lower low points, and subsequently a new downwards trend.

Earnings continues …

Although majority of the most influential companies have already released their 3^rd quarter earnings announcements, there are still a large number of companies scheduled for release over the coming week.

Some of the more influential include:

Monday 5^th November
APC	After Market Close
CAH	Before Market Open
MVL	Before Market Open
Tuesday
VLO	Time not supplied
Wednesday
AL	Time not supplied
AIG	After Market Close
CSCO	After Market Close
GM	07:00 am ET
JCOM	Time not supplied
NWS	Time not supplied
TWX	Before Market Open
TM	01:00 am ET
Thursday
F	Before Market Open
QCOM	After Market Close
DIS	After Market Close

FMR Analysts Outlook …

Last week we had discussed our expectations that the markets would fall. With Thursday market drop, our expectations have been confirmed. The fact that sellers entered the markets the day after Interest Rates were lowered is of great concern for investors, showing that there appears to be greater selling strength underlying the general market sentiment.

FMR Analysts will maintain the “bearish expectation” we had discussed last week. There is still a high level of “uncertainty” for medium-term market direction. Especially with Friday’s activity failing to follow through with much direction and holding a previous low point (as potential support).

If we were to find the Russell2000 index breaking below 785 points, a confirmation of a downwards trend and a change in trend conditions will have formed. Our expectations would be for a retracement back towards 750 points, which coincide with the lows of August.

With a large number of economists beginning to talk about 2008 as being a year of a “market recession”, investors are likely to become more nervous over the next month or two. Negative economic announcements are likely to have more of an impact then we would normally expect.

If the Russell2000 index holds its support level at 785 over the coming week, then watch out for the start of a medium-term trading range. There is strong resistance at 850, which has formed over the last 6-months.

What we might find occurs into the end of the year is a consolidation market as investors decide whether or not they should remain committed to stocks heading into 2008.

FMR Strategy Analysis …

Bulls continue to beware. The major averages have formed a lower high point, and if they break into a new medium-term low, will have a defined downwards trend. This is a turbulent period to be considering new positions, and should only be approached by confident traders/investors.

Bulls: A short-term rally would define a support level and potentially send the markets into a sideways consolidation pattern.

Bears: A lower high point has formed on the major averages, and if further selling pressure persists, we are likely to find a new lower low point. This would denote a downwards trend, ideal for the Bears.

Investors: For long-term investment positions you are not willing to exit right now, investors should enter into protection positions. Put options will have increased in value over the last week, making it more expensive to hold the protection. But if sellers persist this week, protection (or ideally exiting) will be a necessity. If you have a portfolio that reflects a particular index, such as the S&P500, purchase an index Put option to protect your portfolio. We suggest slightly Out of The Money because this will be slightly cheaper (and therefore less cost of risk), and if the markets do continue to retrace, will produce a reasonable return to offset loss on stock positions (though will not be a 100% hedge – merely offset losses). Time frame for protection should be at least December or January expiration, though January is more optimal. FMR Analysts do not suggest entering into new long-term stock positions at this point.

Traders: Consider Bearish reversal alerts for either CFD or Option traders. Look to enter positions if the markets continue to show bearish activity.

Option Writers: Volatility has increased, which is preferable for option writing. However, with a reasonable potential that the markets may continue to fall in value, Naked Put Writing is a very dangerous strategy to enter right now. You could enter into Covered Call positions to help lower breakeven levels for existing stock