Daily Market Reports | May 19 2009
By Greg Peel
The Dow jumped 235 points or 2.9% to be back over 8500. The S&P gained 3.0% to be back over 900 and the Nasdaq gained 3.1%.
Wall Street is nothing if not trigger happy at this point. Just when it looked like the party was starting to wane after the biggest bear market bounce since the thirties, a night of good news was enough to spark the biggest single-day rally in a month. US traders went to bed with the Dow futures heading south again in electronic trade but when they awoke it was a different story.
The futures had turned around as they slept and it was all about India. The Sensex is not often on Wall Street’s specific radar but when one considers that India is always mentioned immediately after China as being a potential emerging market saviour for the world, a 17% jump in that index could not be ignored. The emerging market trade was back on.
The Indian election returned the incumbent government. Is this really cause to get quite so excited? Apparently so. After a period of economic difficulty, security volatility and political posturing, India decided to stick with the moderate government and that is good for business. And the fact that a Gandhi will shortly take the reins was another reason for comfort. There was a risk no party would win enough votes to prevent forced negotiations between everyone from religious fundamentalists to communists in an attempt to form some sort of unstable administration. That risk has now passed.
What’s good for emerging markets is good for America, and Wall Street took off from the open. It then proceeded in a straight line to the upside all session, with a final little kicker on the close.
The next piece of good news in the morning was the first quarter earnings result from retailer Lowe’s. Lowe’s saw its profits fall 22%, but that was not as bad as expected. It also posted better than expected second quarter guidance. The reason this was such good news is that Lowe’s in the US is not a purveyor of flannel shirts and stone-wash jeans as it is in Australia, but a home improvement centre. Good news on the home front is good news for America.
Looking into the numbers, analysts were not necessarily quite as excited, however. The result was highlighted by extensive cost-cutting rather than a strong result in revenues. Revenues were boosted by reducing the levels of discount the company had been forced to offer in the previous quarter, and the majority of those revenues came from small-ticket items such as paint. Sales of big-ticket items were still weak. This implies that Americans have settled on a new lick of paint as a home improvement measure for the time being, rather than a new bathroom. This is not the stuff of rapid recoveries.
But the Lowe’s result proved only a precursor to the afternoon’s good news. The National Association of Home Builders released its monthly sentiment index, and it rose to 16 in May having been 14 in April and 9 in March. What this means is that home builders, who have been mightily depressed for some time, are starting to feel better about things. It is not a price index but a confidence measure.
There is little doubt some of the recent housing related data have shown signs of easing. The stock market is also up 30%. Home builders are clearly feeling better about both those events and now Wall Street is feeling better about home builders feeling better.
Financial stocks did not miss out on the rally last night and indeed had a strong session. The stock analysts at Goldman Sachs advised clients to buy those banks which are paying back their TARP funds (they cannot comment on themselves however) and even put Bank of America on their “conviction list”. A Goldmans conviction list (and GSJB Were has the same in Australia) is a list of stocks for which not only do the analysts have a Buy rating, but they think they may be right about it.
The banks also responded well to the sentiment of home builders and the good result from Lowe’s, given positive news in housing implies more new mortgages and that’s how banks make money. At the end of the day it was an all around love-fest. There was one small problem however – it was all achieved on only light volume. This implies, yet again, there was probably more short-covering going on than there was committed fresh buying.
The rest of the markets nevertheless went back into raging bull mode.
US Treasuries were sold, sending the US dollar index lower. The yen was sold, implying risk trading was back on (sell yen, buy rupees?). The Aussie shot up about 1.7 cents to US$0.7664 as a source of resources to India. Gold was sold.
Gold fell US$13.70 to US$916.80/oz. This is interesting because it means a break in the recent pattern. As Wall Street was reaching its recent highs on strong volume, gold was pushing ever higher. This was due in part to a weaker US dollar, but it also meant the safety traders were not prepared to sell. They were not convinced about the rally. Last night looked like a rush to take profits.
The lower US dollar and strong stock market were good for oil, but oil also traded higher given Nigeria is back in the spotlight. The Nigerian rebels, whose favourite sport is blowing up pipelines, have been quiet for a while but suddenly clashes have intensified once more. Oil shot up 4.9% or US$2.76 to US$59.11/bbl.
Over in London, copper turned around to post a 2.3% gain on the weaker dollar and strong stock market and dragged the others with it. Only zinc at 2.4% managed to out-do copper in what was not a hugely inspiring session. Traders cite the upcoming summer holiday slow-down as a reason not to go rushing in this time.
To cap off the feel-good trades last night, the VIX volatility index fell 8.7% to 30.24. The intra-day low was 30.00. This is as low as the index has been since September last year.
Indeed, the VIX finished August last year at 20. At that time, the low thirties had been as high as the VIX had been throughout the entire credit crisis. When Lehman went under however, the subsequent fall-out saw the VIX shoot to blue sky at 90. Now that we are back at 30 it seems like a very low number, and indicative that put protection is being unwound, but in the wider scheme of things, it is an historically high number. If it keeps going down to 20 it’s really time to get worried. That usually indicates misplaced complacency.
The SPI Overnight jumped 63 points or 1.7%. Add that on to yesterday’s close of 3735 in the physical ASX 200 and we’re back over the January high again. We still have to pass 3941 to be higher on the rally nevertheless.
Just as rallies never go up in a straight line, never do pullbacks go straight down. The good news is that Wall Street is still keen to jump on any further sign of silver linings. The bad news is last night was less than convincing. But it doesn’t hurt.
