Daily Market Reports | Jul 10 2008
By Greg Peel
The Dow fell 236 points or 2.1%. The Nasdaq fell 2.6%. The S&P 500 broad market index fell 2.3% to 1244, breaking down through what had proven to be reasonable support at the 1252 previous low, and registering a fall of more than 20% from the high. The S&P has now joined the Dow and the Nasdaq in official bear market territory.
To understand exactly what happened last night requires a bit of head-scratching. Because in short, nothing happened. Amazingly, oil rose by a whole US1c. There were no economic data of particular consequence. There was nothing of particular consequence anywhere.
What this shows is that while the 20% mark might represent someone’s official measure of a bear market, the numbers really mean little. In a day of few catalysts many traders simply stepped to the sidelines. Those left to fend for themselves clearly became frightened, and so they sold. At midday the Dow was flat. Twenty minutes before the bell it had fallen by 130 points. Twenty minutes later it had fallen by 236 points. The volume was light compared to the volume of Tuesday’s rally.
Bottoms are never formed on light volume. To create a bottom requires a pinnacle of fear and this was not registered last night. Apart from the light volume, the VIX index – which seems to have become everyone’s favourite indicator now – is still only at 25. It was at 26 when the Dow first broke the March lows. There is a ways to go yet.
Financials were the hardest hit, having been among the best performers on Tuesday. If there were any catalyst at all, credit rating agency Fitch put Merrill Lynch’s long term rating on watch for a possible downgrade. This is hardly “omigod” stuff. But Merrills shares fell 9%.
Lehman shares fell 11%, Citigroup 5%, Bank of America 6% – the list goes on. But the most bizarre of all falls were in yesterday’s heroes – Fannie and Freddie. The two government -sponsored mortgage lenders both fell around 16% on Monday when Lehman analysts declared they would each need to raise tens of billions of new capital. They each turned and rallied about 12% yesterday when Hank Paulson said the government was very focussed on supporting the two (although to be fair, Paulson did not offer to buy any new capital, just to support the effort). But last night with no new news Fannie fell 13% and Freddie fell 24%.
The fall in financials also reversed the positive sentiment flowing on Tuesday from Ben Bernanke’s assurances and offer to keep the emergency lending facility open indefinitely.
The earnings season kicked off after the bell on Tuesday with Alcoa, and the result was better than expected. This provided impetus for the market on the open for about five minutes. By day’s end, Alcoa was down 6% in the rush. Wall Street is supposedly very worried about what the earnings season will bring, or at least that was the justification from some commentators last night.
Weighing on worried earnings sentiment is the oil price. But the performance of oil last night could only be considered rather extraordinary. Not only did the weekly crude inventories data show a greater than expected fall, but late yesterday (Australian time) the Iranians – who had been looking more conciliatory this past week – test-fired a series of long-range (Israel-range) missiles into the Gulf. A month ago this would have been enough to send oil up by US$10. The inventory data alone would have been good for US$3-4. But oil rallied only about US$2 initially before falling back again to be up only US1c to US$136.05/bbl.
Oil wants to fall.
Gold responded as it might however, jumping US$9.10 to US$928.10/oz. The US dollar erased yesterday’s gains, spurred on by Iranian concerns, more inflation-speak from Trichet in Europe, and in sympathy with the stock market. The Aussie – which had weakened on sentiment and housing data in yesterday’s local session – was back up about US0.3c to US$0.9565.
As the US dollar began to fall and gold rally, base metals began to move up again as well. Suddenly technical stops were triggered in those metals most beaten down of late, and short covering ensued. Oil pulled back, and aluminium and copper sat on the sidelines, but nickel and zinc closed up 5% and lead 8%.
The SPI Overnight fell 65 points which, at least at the open, would put us back under 5000 once more.
They’ve been keeping a keen eye out at the stage door, but as yet there is no sign of any fat lady.
