Daily Market Reports | Oct 16 2008
By Greg Peel
The Dow fell 733 points or 7.8% but the S&P fell a solid 9.0% and the Nasdaq 8.5%.
For the technical analysts, the Dow closed at 8577. On Friday last the Dow opened on a gap down at 8420 and closed at 8450. It then gapped up on Monday, providing what is known as an “island reversal”. Charts do not like gaps – they’re discontinuous – and often the market will seek to close them. Thus to close the gap to Friday’s close we need to see another 130 down and to the Monday open gap we need another 30 points on that. The intraday low, however, is 7773 or another 800 points below today’s close. In relative terms, the numbers on the S&P 500 are similar.
There is consensus among experienced traders that this bear market will never end on a “V” bounce. This is when the market falls sharply, hits the low, and turns around and rallies back in a straight line. They were expecting that Monday’s big rally would not hold in the immediate term and that another low would have to be seen, perhaps even a test of the former low.
That’s exactly the sort of pattern playing out at present. Market “crashes” tend to be followed by a “double bottom” before they can return to a rally, albeit a rally featuring very sharp up-days punctuated by perilous drops. If the subsequent highs and lows can be consecutively higher, then we are on our way out in at least the shorter term (months). If the previous intraday low is breached and breached in a big way, then we’re still heading south.
The trigger for today’s weakness was the September retail sales figure, which saw a fall of 1.2% against expectation of a fall of 0.7%. September was the month the world started to fall apart. This grim news was followed by the release of the Fed’s “beige book” for September, which is a survey of the twelve Federal Reserve economic regions. The Fed announced all twelve regions had seen a reduction in economic activity. It is rare to get a 100% result like that.
On that news, the Dow tanked from the outset, attempted something of a recovery after lunch, but then three o’clock struck. The past sessions of “crash” have featured the bulk of each day’s sell-off occurring after 3pm which is the time the “market on close” redemption selling hits. Funds needing to raise cash look to see how the day’s trading pans out, and if it is weak then they have no choice but to sell in order to raise cash for redemptions. Selling begets selling.
Wall Street’s historic bounce on Monday was not due to the fact redemption selling was over. The market simply responded to the global government rescue package, and funds with redemptions lined up simply elected not to sell. Why sell when a bounce is underway? But the redemptions don’t suddenly become “un-redeemed”. The need to sell at some point remains, and thus if the bounce does not hold the funds are back to slamming the market late in each session.
Only when redemption selling has dried up can the market recover, and any sign that has occurred will bring in the buyers. Redemption numbers to date have reached records, but we still don’t know how much is left. These are not publicly available numbers.
To turn back to the economic data, one is prompted to ask: Is this really “knock me down with a feather” stuff? So the economists got it wrong – they haven’t been right for a year. There is a similar confusion surrounding third quarter company earnings results. EBay came out after the bell with a lower than expected result and lower than expected fourth quarter guidance, causing the stock price to tank further in the after-market. But then stock analysts have also been wrong all year.
As weak economic data and company earnings begin to dominate the landscape from here, there will be more pressure on the stock market. But we are down 40%. How far must the market fall be for we have discounted the inevitability of a US recession, and indeed a global recession? Stock markets are leading indicators.
The answer to that question depends on just how bad the recession becomes, and that is up for debate. What we do know is there is still a deleveraging process underway in financial assets, and that is not about to end anytime soon. On the flipside, massive liquidity has been poured into the market by the world’s governments and central banks. That money takes time to flow to where it is needed.
Last night the Libor rate continued to edge down slowly, which is a positive. On the negative side however – and this is something that continued to spook the stock market – a US T-bill auction showed there is still incredible demand for short-dated US government securities. This is your “flight to quality” paper, and given that the yields are now close to zero and inflation is running (at last count) at over 4%, fearful investors are happy to effectively pay the government to hold their money for them, lest it diminish any more. But there has been little movement in yields at the long end (ten-year bonds for example), suggesting there is no rush to lend the US government money in the wider scheme of things.
The stock market would like this situation to reverse. Once again, this is not something that will suddenly happen tomorrow.
The US dollar was mostly higher last night, which more reflected weakness in Europe (European stock markets similarly tanked) and further unwinding of yen carry trades. The Aussie was slammed again, and fell three and a half cents to US$0.6613.
The stronger dollar and weak economic data was not music to the ears of commodity markets, and so oil fell US$4.09 to US$74.54/bbl and base metals fell 5-9% in London with copper being the worst performer.
Gold, on the other hand, moved up US$11.60 to US$846.80/oz as it responded to more market weakness and fear.
The SPI Overnight fell 301 points or 6.7%. Yesterday the ASX 200 parked itself smack on the Fibonacci break-down level of 4300 at the close, poised for the next development. We now know the next development, and the chaos continues.
