Daily Market Reports | Apr 24 2009
By Greg Peel
The Dow closed up 70 points or 0.9% while the S&P gained 1.0% and the Nasdaq 0.4%.
It was another day of constant fluctuation, not unlike Wednesday, only this time the 3pm sell-off turned sharply at 3.30pm into a late rally. The Dow closed on its high for the day, having been down 82 points at midday. A quick glance at the chart shows about eight major turning points in the session and several traverses across the flatline.
This is a market that appears very volatile, but when you consider that trading post-September last year featured turnarounds in the hundreds of Dow points, this double-digit stuff is mere child’s play. In other words, stock markets are far less volatile now than they were then, evidenced by the VIX volatility index, which hit 90 last year but remains stuck just under 40 at present.
And that’s good news. The rally from early March has now gone into sideways mode (at least until some new bombshell is dropped). The “bear market rally” school was expecting that this very sharp (25% in the S&P) rally over the past couple of months would peak and fall just as fast when reality bit. But the “we’ve seen the bottom” school is preventing that from happening. CNBC this morning had some interesting data to consider.
The rally, according to trading data, has been driven by “plain vanilla” mutual funds. They have been the buyers. The equivalent in Australia would be your balanced super funds within AMP and co for example. These guys are playing for the longer term and they are index buyers, not stock pickers. Selling into the rally have been the hedge funds. These are the shorter term players, the stock and sector pickers, the short-sellers, and hedge funds have been the greatest proponents of the “bear market rally” school. Standing on the sidelines doing nothing – waiting for a sign – has been the retail market.
The implication here is that the buying is “real”. Mutual funds only make occasional adjustments to their portfolios, and if they have now made a decision to start reducing cash holdings and to put that money “back to work” then they don’t mind if they don’t pick the actual bottom. Nor do they conduct such transactions in one day – they will more likely have placed orders to buy over a period rather than chase immediately. It would tend to suggest the market now has support on the downside.
The upside is influenced by the fact hedge funds are short, and not winning at the moment. Even if short term valuations are looking stretched (banks, resource stocks for example), a new piece of positive news could trigger a round of short-covering and send this market into a second phase of rally. The higher the market goes in the short term, nevertheless, the more it will be overvalued against economic reality. For the retail market, the likelihood is a bit more waiting. Nervous retail traders don’t want to rush in and be caught by what might be a bear market rally. The best result for them would be for the market to retreat back towards the March 6 low, but not reach it, before more mutual fund buying acts as the dampener. Then retail buyers can begin to feel more confident.
This market was never going to “V” bounce its way out of disaster. It’s going to be more a case of turning around the Queen Mary, and it could be another six months before we can honestly start to use the words “bull market”. But the fact that the stock market is currently holding up – hanging around in a “trading range” – is a more positive than negative sign.
One thing to bear in mind though: this is a bear market rooted in the credit markets. The stock market is trying to recover but credit markets have not. Can one honestly recover before the other?
And still the negative economic data roll in. Sales of existing homes fell 3% in March according to the National Association of Realtors. Americans are desperately wanting to call a bottom in the housing market, but while there may be timid signs of stabilisation we are still a long way from being positive.
The weekly new jobless claims number of 27,000 was more than expected. This weekly number is volatile, but each week the number of continuing claims is counted and that figure has reached 6.14 million – another record – and twice the figure this time last year.
On the earnings front, eBay and Apple gave Wall Street a reasonable lead in but United Parcel Service – an excellent barometer of economic activity at the coal-face – posted a loss and guided for more losses ahead as business disintegrates. A couple of regional banks posted pleasing results, and then after the bell we had a rush with all of Amazon, Microsoft, American Express and biotech leader AmGen reporting. Amazon had been bought up strongly in anticipation and beat the Street, but guidance was not hot and its shares fell. Microsoft had a shocker, but they bought it. Amex posted a 63% reduction in profit but not as bad as expected so it was up, and AmGen is a bit weaker in late trade.
All in all a mixed bag – the story of this earnings season, and another reason Wall Street is stuck in a trading range.
The Union of Autoworkers last night agreed to terms that would allow Chrysler to file for bankruptcy. Chrysler is unlisted, but this had a negative impact on General Motors shares. Chrysler is the much smaller employer of the two, so this does not necessarily imply the UAW will also endorse the death of GM. And there’s still a matter of how to deal with the bond holders.
The US dollar fell sharply against the Canadian dollar last night. This is interesting to note given Canada and Australia are similar economies. This week Canada cut its rate by 25 basis points as well but this takes it to a mere 0.25%. Canada has suffered heavily from having the US as by far its biggest trading partner, rather than Asia. But the market was expecting the central bank to announce it would commence quantitative easing, as it had flagged. Yet instead it put the decision off for a month. That’s why the loonie shot up against the greenback – the US and UK in particular are becoming more and more isolated as the big quantitative easers.
Nor is Europe a quantitative easer. Last night combined Eurozone purchasing managers index releases showed signs of stabilisation. The implication is that the second quarter 09 will not be as bad as the first. One firm is forecasting a GDP contraction of only 0.6% in Q2 for Europe against the 1.7% contraction in Q1. The euro shot up on the data, sending the US dollar index lower.
The pound also rebounded somewhat after its big drop on Wednesday following the UK budget release. The weak greenback had the Aussie up a cent to US$0.7147, while gold ramped back through the 900 mark – up US$12.80 to US$903.20/oz. Gold’s back-from-the-brink performance this week can be put down to a combination of factors. There’s the weaker US dollar (the inflation trade), weak economic data (fear trade) and probable setting against the upcoming bank stress test results (safety trade).
Oil used the dollar as an excuse to rise US76c to US$49.61/bbl as it continues to defy record US crude inventories.
Base metals were unable to capitalise on a weaker dollar however. Copper inventories have again fallen but traders now fear that not only has short-covering ended, the Chinese have also completed their restocking phase. Copper fell 3.5% as all bar tin fell 1-3%.
The SPI Overnight rose 18 points or 0.5%. This is a strong result given a rather artificial rally in the ASX 200 yesterday. While a takeover offer for Lion Nathan was genuine, it was option expiry day, and bank stocks were strongly bought up, probably by proprietary market-makers short options at this level. It was an accelerating rally, which smacks of “short vol” (for those who understand such things), and may require correction today despite a strong finish in the Dow. It’s also Friday, but then I’m usually reluctant to try to pick a single day’s movement. Lord knows I’ve been wrong before.
