Daily Market Reports | Jul 08 2009
By Greg Peel
The Dow fell 161 points or 1.9% while the S&P fell 2.0% to 881 and the Nasdaq fell 2.3%.
I like to play a little game with myself each day when I arise to a dark, freezing Sydney morning some time after 5am and turn on the business channels. As I reach for the remote I make a prediction on the market’s movement in New York. This game had become a bit pointless over June, given Wall Street’s generally small range and mostly sideways drift, but this morning I pressed the button and said to myself, “down big”.
Am I the Wall Street guru? Not at all. It’s just I felt Monday’s rush to shift out of risk stocks and into defensives told a fairly clear tale. That’s why I gave yesterday’s Overnight Report the title of “Losing Faith”. There were no economic data releases last night in the US to affect a move one way or the other, and there aren’t many players in the market at present given summer holidays. It’s like January in Sydney. And so it was that Wall Street took a tumble, on very light volume, to basically now wipe out all of May as well as June.
Well may we say, “Sell in May and go away”. The Dow closed on April 30 at 8168 and last night at 8163. The S&P 500 closed on April 30 at 872 and last night at 881. Of course, the S&P reached its rally-peak of 946 on June 12 so it was a little late, but it has now fallen 7% from that high. The bottom was 676 on March 9 to provide a 40% rally to June 12. Many a commentator has assumed there would need to be at least some sort of pullback in such a sharp rally, and market psychology was always on their side. A typical correction is 10%. That would take us to 852. And many a commentator has suggested 850 would be a healthy level to fall back to before buying could recommence. On the way up an important technical level was 878. Technicians said a breach of this level would take the S&P to 900 and beyond, and so it was. But 878 is now the important level on the downside. This time a breach might take us straight to 850. Its only 3 points away.
Again one might use oil as the proxy for lost faith in a rapid recovery, or more realistically evidence of a market that had overshot on exuberance. Oil fell again last night for no specific reason, down US$1.12 to US$62.93/bbl. Once again it was the risk sectors – those most leveraged to economic recovery – which took the hit: energy, materials and industrials. The defensive sectors such as healthcare were in the green last night, but this time not enough to stem the general tide.
Weakness was also accredited to one of President Obama’s advisors – a member of his Economic Advisory Panel – who made an offhand public statement that a second stimulus package focused on infrastructure spending may be needed. This spooked a market already jittery about the level of US debt, but Laura Tyson was very much out on a limb. Congress representatives dismissed the idea as very unlikely, particularly given the fact the original US$800bn-odd of TARP has not even yet been fully allocated, and has recently been topped up by banks returning their capital injections.
Furthermore, Obama’s consumer stimulus came in the form of tax cuts (as opposed to Rudd’s cash hand-outs) and since those were implemented America’s personal savings level has leapt from negative numbers to positive 6.9%. That’s where the stimulus money is going.
On the subject of US debt, last night the Treasury auctioned off US$35bn of 3-year notes. The price was not great but demand was quite robust. Tonight sees the auction of US$19bn of 10-years and US$11bn of 30-years, which has Wall Street on its toes again. But the 10-year yield actually fell 5bps to 3.45% last night, suggesting the inflation fears of last month have since abated.
Fresh demand for bonds was accompanied by further strength in the US dollar index, which rose 0.38 to 80.71. The Aussie subsequently fell nearly a cent to US$0.7904. Gold trod water – falling only US20c to US$924.50/oz on the 24 hour mark, as selling on the stronger US dollar was met by a little bit of renewed fear buying. At the moment gold almost seems in a state of suspended animation.
Not so for base metals, which mostly fell another 1-2% again in London. Renewed fear support for gold was echoed in the VIX volatility index last night, which jumped 6.4% to 30.81. The VIX’s June excursion into the relaxed 20s seems over for now.
Our reverse square root sign appears destined now to give way to a “W” – or does it? A “W” implies we go back to the lows again. The bulls took heart last night that volume was extremely light, implying there’s simply no one around at the moment to do the buying. The northern hemisphere summer holidays are an influential factor in the “Sell in May” dogma. But what might make the big difference is the upcoming US quarterly reporting season.
That season “officially” kicks off tonight with Dow component and everyone’s favourite whipping boy, Alcoa. Alcoa is a bit of an outlier on the bell curve of reporting dates however, and the bulk of results are still a week to two weeks away. The season lasts a month or more and will tail into the Australian year-end (for most) reporting season which will get underway around the second week in August.
How those results are received will determine whether or not a “W” is on the cards. The results don’t need to be positive, they just need to not be worse than analysts are forecasting. Have analysts become overly enthusiastic about green shoots too? We’re about to find out.
The SPI Overnight fell 62 points or 1.7%.
