Daily Market Reports | Jul 28 2009
By Greg Peel
The Dow closed up 15 points or 0.2% while the S&P added 0.3% to 982 and the Nasdaq added 0.1%.
Wall Street was in the green briefly from the opening bell and just scraped over on the death last night. In between it was all red, with the Dow falling 59 points at its nadir. It was yet another day of light volume trade – typical of the summer break but not typical of a raging bull market. It was within this light volume that Wall Street showed some resilience late in the afternoon.
It is not surprising that cash is still attempting to flow into the market at these loftier levels given the sudden optimism of all and sundry. Yesterday I published an article The Global Recession Is Over, choosing just three examples of economists and traders who have called the end of the downturn. They are not the only three. Then last night in the US, the latest Newsweek was released with the cover “The Recession Is Over”.
I was asked by a subscriber recently to explain an expression I had used – “ringing the bell”. The metaphorical bell is rung when the very last buyer comes in off the sidelines and fills his order. This is the signal to the market the top has been reached (at least in the short term). Other examples of when the bell might be rung include when your taxi driver tells you he’s just bought BHP because the market is going up, he’d heard, or when the popular press starts printing headlines with “The Recession Is Over” emblazoned upon them.
Okay, maybe it’s unfair to call Newsweek “the popular press”. But two things we know for certain are the market never goes up only in a straight line, and markets always over react to the upside and to the downside. The two are obviously linked.
From July 7, the S&P 500 has rallied from 881 to 982 (11%) with only two down-days, and each of those featured a drop of less than one index point. So in full index points, the S&P has rallied for 15 days straight. Over the same period, Australia’s ASX 200 has rallied from 3766 to 4139 (10%) also with only two down-days – one of 4 index points and one a more substantial 57 points. Not quite a straight line but pretty damned close.
The strength of the rally in Australia yesterday just goes to show the amount of faith that has built up in the market. Now don’t get me wrong – I’m sitting here cheering. But just like the nine year-old boy who climbs rapidly up a big tree only looking up, and then looks down to realise he’s one helluva long way up and suddenly frightened, one must expect a pullback soon.
I hope I’m wrong, but the natural flow of things is to have a pullback, which is actually healthy. The question then becomes how far back? The good news is the higher the market can push ahead, the higher the point will be to which it pulls back. At this stage we will not go back to the lows because there is too much money still only the sidelines – fretting that it may be missing out – and looking for the “dip to buy”. And then we have blaring positive headlines.
I will still not discount a pullback to the March low some time in the next few months, but as each day passes that level looks more distant. I am nevertheless reminded of the ninth rule of Bob Farrell’s Ten Market Rules To Remember: “When all the experts and forecasts agree, something else is going to happen”.
So send your abusive emails now, but remember that I want to see a rally too, just not one fuelled by red cordial.
There was good news in the US last night on the home front. June new home sales jumped 11% in the month which is the biggest jump in eight years. This sent home builder stocks soaring. But one needs to put the result in some context. The house price index fell to be down 12% in twelve months, and 6% down from May. New homes are being bought because prices are that much cheaper. The US government’s grant package (worth US$8000) expires in November.
And then there was sobering news from Verizon. The Dow component telco released a quarterly result which beat on the EPS line and matched on the revenue line. But EPS was down 21% and revenue was up 11%, of which 9% related to an acquisition. This time last year Verizon employed 229,000 people and now it has 235,000 – that’s good news. Verizon has been rapidly turning over its staff by letting go of land line technicians and replacing them with wireless technicians. But the company announced last night it would lay off 8,000 land line technicians in 2010 and this time not replace them, in order to reach necessary cost cutting targets.
This news shook Wall Street back to a level of reality.
There was good news immediately after the closing bell however, when the world’s largest biotech, Amgen, beat the Street comfortably on EPS and upgraded its ongoing profit guidance.
There was not a lot of enthusiasm through the day session however, and part of the reason is the US Treasury is this week issuing US$235bn in notes of various maturities. This is another new record after the record week set in June. Wall Street went into nervous mode once more as the first load of short-dates were auctioned last night. The auction was successful, but the fun starts tonight with US$42bn of two-years, followed by US$39bn of five-years on Wednesday and US$28bn of seven-years on Thursday.
The problem with these bond auctions as they relate to the stock market is the result has to be just right. If there is too much enthusiasm for US bonds, this implies investors are preferring bonds to stocks at this point. If there is little enthusiasm, alarm bells will ring. For that will mean the US dollar will come under severe pressure, and the stock market will react to the downside. In order to prevent a downside risk on either end of the scale, bond demand has to be comfortable, yet not excessive.
More evidence of nervousness was indicated by the VIX volatility index last night. It shot up 5% to 24.28, having hit the low 23s last week. This implies a bit of put protection may once again be the order of the day.
Oil followed the choppiness of the stock market last night, eventually closing up US33c to US$68.38/bbl. The US dollar index was down slightly to 78.65, while the Aussie was three-quarters of a cent higher from Friday night at US$0.8228, following yesterday’s enthusiastic local stock market rally.
Base metals again started their day with a burst in London, only to see profit-taking when Wall Street headed lower mid-session. Copper still managed a 2.5% gain and nickel 3%, while the others finished only slightly positive.
Gold was US$2.00 higher to US$953.40/oz on the weaker greenback.
The SPI Overnight was up 5 points.
Stand by for an early season indication today from engineering contractor GUD Holdings’ ((GUD)) full-year today.
