The Overnight Report: Bring On The Holiday

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By Greg Peel

The Dow fell 186 points or 2.3% while the S&P was down 2.4% and the Nasdaq 2.8%.

There is not much to say about last night’s session, other than the market slid from the open to be down over 200 points at 2pm, attempted a rally right to about 3.30pm then sunk on nothing. With traders eyeing a long weekend, and the market prepared to sit on the sidelines as the earnings season offers its first indications, volume was poor.

The bank stocks – focus of attention for their leadership role – went nowhere. Just as they didn’t participate much in the last little up-leg of the rally they didn’t fall last night.

An interesting point to note is that the VIX volatility index actually fell last night. It is rare that the stock market and the VIX move in the same direction. I have noted a few times recently that the 25% rally in the S&P has not drawn a fall in the VIX below the significant 40 level given traders unconvinced by the veracity of the rally have chosen to keep up their put protection. But last night the VIX fell half a point to 40.4 even as the Dow was down 200 points and perhaps signalling an end of the rally to some. Yet there was no rush to buy more puts. If anything, traders buying puts at the top were unwinding.

If none of this makes any sense to you, just take it that the VIX is saying we are not heading back to the lows even if we have a pullback in this rally. At least that’s what it said last night.

One reason why the VIX may be destined to slip below 40, irrespective of specific stock market direction, is that the SEC last night announced it would release proposals for consideration tomorrow night which revolve around a reinstatement of the uptick rule. The uptick rule, which was rescinded in June 2007, prevents short-sellers from selling stock below the last trade and thus hammering down share prices. A lack of uptick rule is a significant factor in increasing market volatility, to which trading patterns since June 2007 readily attest.

If short-sellers can’t send markets crashing then investors feel safer and thus perhaps do not feel the need for high levels of downside put protection. A fall in the demand for puts will drop the VIX. A drop in the VIX below 40 will instil further confidence in this market.

After a second day of falls in the stock market, the US dollar has again moved higher as again investors consider Treasuries as a safer place to be. The Aussie slipped back to US$0.7104 with a little help from a rate cut, although 25 basis points was really the neutral result.

But gold bounced back! After a few days of safe haveners exiting the market at the expense of the inflation traders, a bit of a stock pullback saw gold rebound from sharp falls, climbing US$13.40 to US$882.10/oz. Note that gold’s move ignored dollar strength, and indeed gold has shown little traditional correlation to the dollar at all over the past week or so.

A stronger US dollar was enough to burst the dam in oil nevertheless. Oil has shot up recently on a combination of a mostly weaker dollar and encouragement from a stronger stock market. But with both turning against it last night speculators lost faith and oil fell nearly 5% or US$2.46 to US$48.59/bbl. Back in the real world, traders remain concerned about continually building US inventories.

Base metals were a mixed bag of indifference in London, with copper the only highlight showing a 1.6% rise. Copper traders are hoping the Chinese will not finish their restocking for a while yet.

The SPI Overnight was down 63 points or 1.7%.

The real action came after the bell. Alcoa’s first quarter earnings result release sounds the horn and we’re off. Alcoa posted a US59c EPS loss against the Street’s US56c loss expectation, but the market’s reaction was not dire. Alcoa shares are down 2% in the after-market as I write. The feeling is that while Alcoa came in short, (a) analyst forecasts have been a constantly moveable feast coming into earnings season and (b) if it’s not really, really bad, then it’s actually good.

The response to Alcoa may well have set the scene for the rest of the season.

If you’d have to take a stab, you’d probably expect that a retailer would have had a shocking first quarter and a fertiliser producer maybe not so bad, given grain prices have been moving up again from their lows. However, hot on the heels of Alcoa came the results for Bed, Bath & Beyond and Mosaic. The former speaks for itself and the latter is a competitor to Incitec Pivot ((IPL)).

BBBY beat the Street solidly and was up 14% in the after-market. Mosaic came up short and has lost 9%. Again – this earnings season is simply going to be all over the shop.

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