Daily Market Reports | Oct 29 2008
By Greg Peel
The Dow rallied 889 points or 10.9% while the S&P gained 10.8% and the Nasdaq 9.5%.
The Dow smashed back through the 9000 level to 9065 while the S&P smashed back through the 900 level to 940. Once again there were cheers on the floor of the NYSE as the Dow took out consecutive 100-point levels. Once again there were smiles and exuberance. But the lingering problem is, we’ve seen this movie before.
On October 13 the Dow rallied 936 points following the globally coordinated bank deposit guarantees – just over two weeks and about two lifetimes ago. Then the Dow rallied from 8451 to 9387 while last night it was 8175 to 9065. Not only was the rally from a lower base, but it was not smooth sailing either. On October 13 the Dow rallied from the open, stumbled slightly, and then rallied again. Last night the Dow was up 320 points at 10am and square again at 11am. It was up 310 at 1pm and only up 150 at 2pm. Just before 3pm it was up nearly 500 points and then it wavered.
But only slightly. The three o’clock wave proved merely a ripple and so the green light came on. The Dow added about 300 points in the last hour.
The October 13 rally was achieved on Columbus Day in the US – a day when the bond market was closed and the NYSE was only partially patronised. Volume was light, and old-hand traders were unconvinced, suggesting a lesser rally on larger volume would have been more encouraging than a large rally on low volume. They feared the movement was fleeting and that the lows could be tested once more. They were dead right.
Last night was not a holiday in the US, and not only was the bond market open, but credit spreads are now on a downward trend, which is encouraging for the stock market. What the October 13 rallied achieved was a trigger for wave after wave of redemption selling in the post September quarter window, setting off further margin calls and proprietary selling to cover option positions. Volatility has since been unprecedented.
Unfortunately, volume was also on the modest side last night. This week marks the end of the mutual fund redemption window, and it is understood that the bulk of the hedge fund redemption windows will be closed by November 15. Last night’s rally owed little to exuberant buying. It was all about a lack of selling. Have we exhausted those redemptions now? Or will we see a last gasp mutual fund dump by Friday and more selling into early November from hedge funds?
History shows the sharpest rallies always occur in bear markets, not bull markets. We have thus again experienced a classic bear market rally. But barring any unforeseeable exogenous events ahead, maybe this time the rally might have a bit more impetus – this time we may not have as many sellers waiting for their cue. It is not likely, however, that we will continue to rise in a straight line. There will be more sharp down days ahead of us.
We cannot meaningfully rally, nevertheless, without the conviction of buyers. At the moment Wall Street is playing a game of Sevens rugby – the field is the same size, but with only half as many players the action moves back and forward, up and down in the blink of an eye. What we need is 15-man rugby – the action moves less wildly but the result is more convincing.
Tonight the Fed makes its rate decision, and a 50 point drop to 1.0% is already “baked in” to market expectations. If 50 points is correct then there may be some selling given the extent of today’s rally. But nothing is certain in this market. NYSE traders have suggested a Fed rate cut is not all that important right now and will make little difference. It will not necessarily be the simple catalyst to bring the real buyers in from the sidelines.
It won’t hurt.
The redemption selling we have witnessed has not only been driven by the fact fund investors have had to wait from July to October to escape the stock market, but also because of a realisation a global recession is upon us. Disagreement on the likely extent of a global recession has been enough to provoke a “just get me out” attitude. It did not help, therefore, that early in last night’s session it was revealed consumer confidence in the US absolutely collapsed in October, down from a reading of 61 in September to an all-time low (since 1967) of 38. Wall Street had pencilled in 52. To add fuel to the fire the Case-Shiller housing index showed a twentieth consecutive month of decline in August, marking a greater than 16% fall in house prices in twelve months.
The significance of the consumer confidence number is its predictive capacity for consumer spending ahead. The consumer represents 75% of the US economy, and if he’s not willing to spend then the US economy is in dire straits indeed. However, one must consider two points. Firstly, if you were polled a week or so ago on your level of economic confidence, just how confident might you have been as the world was crashing around you? Secondly, stock markets are leading indicators, and will look for an economic recovery typically six to nine months before the economy bottoms.
It was the consumer number that clipped the initial 300 point rally last night and sent Wall Street back to square. But it was some tentative, “things can’t get any worse” buying that reignited the rally, and a lack of sellers that sustained it.
It was also rumoured last night that as an attempt to put a lid on the screaming rally in the yen, the Bank of Japan would cut its interest rate from 0.5% to 0.25%. That doesn’t seem like much, but it is a 50% cut. The G7 has given Japan carte blanche to do whatever is felt necessary. The European Central Bank has also indicated its willingness to cut, at least by its November 6 scheduled meeting. Across the globe central banks are attempting to put a floor under economic collapse, and that can only be good for stock markets looking ahead.
Currency markets thus went into reversal last night, with the yen falling 5% against the greenback and the euro and pound turning around for a decent rally. The dollar index was net largely unchanged but the reversal allowed for commodity prices to also continue their reversals, with the exception of oil. Gold was up US$18.10 to US$748.40/oz and copper was up another 5%. Nickel and aluminium were up 4%, lead decided to rally 12%, and Monday night’s star – tin – put another 11% on top of 13%. Only zinc remains the laggard.
Oil attempted to push higher but was cut off by indications from MasterCard that US monthly demand for gasoline had fallen off a cliff. By session-end oil was down US49c to US$62.73/bbl.
The Little Aussie Battler, spurred on by commodity price recoveries and a bit of help from Dad (RBA buying), leapt nearly four cents over 24 hours to US$0.6437.
The SPI Overnight rose 242 points or 6.4%.
Be prepared for more selling to follow this rally before real buying appears. If we only mark higher than previous lows from more selling however – and the selling pressure appears to be waning – then the real buyers might start a trickle. In the stock market history of crashes a low has been formed most often in the last week of October. Next week is November, and incidentally November 1st (a Saturday in this case) marks the all-time high in the ASX 200 of 6851. Yesterday we closed 45% below that level.
