Daily Market Reports | Sep 25 2009
By Greg Peel
The Dow closed down 41 points or 0.4% while the broad market S&P posted a more substantial 1.0% fall to 1050 and the Nasdaq fell 1.1%.
Wednesday’s movement in the Dow Jones Industrial Average marked what technical analysts call a key reversal – a very bearish signal. On Wednesday the Dow opened above its previous closing level, traded up to a new rally-high, and subsequently closed below its previous closing level.
Yesterday’s movement in the ASX 200 cannot be taken to provide any indication of market direction or sentiment, given it was quarterly stock option expiry day – a day in which those holding long and short option positions battle it out in an attempt to force stock prices over or under exercise prices. (Note, for example, a late push to force BHP above $38.00.)
I have noted for a while that pull-backs cannot occur when all market participants expect one to occur, but are most likely when the market has completely given up on the idea. One could not consider Wall Street to have totally given up on a pull-back at this point, although the latest leg up in the rally suggests plenty of upside capitulation from those having set themselves short in expectation of a pull-back, and plenty of Johnny-come-lately buying from those conceding that no pull-back will arise to allow an entry point. At the end of the day, pull-backs simply require one small but not insignificant trigger.
Last night it was revealed US existing home sales fell 2.7% in August following four consecutive months of increases – four months which have provided impetus for belief in a recovering US economy and impetus for the stock market rally. Over four months, sales of existing homes have risen 15.4%. Despite August’s drop, the level of sales in August was still 3.4% above August 2008.
It’s an interesting contrast. Yesterday it was announced Australian sales of new homes jumped 11.4% in August, marking the biggest monthly increase in three years. But this, too, shall pass. Last night’s US figure brought into focus exactly that which the Reserve Bank of Australia has been concerned about, what the G20 is concerned about, and what many an economist is concerned about, that is, if you take the oxygen bottle of fiscal stimulus away from an economy at present you will find it still cannot breathe on its own.
The fall in US existing home sales was put down to a drop-off in the exploitation of the government homebuyer grant (in the US case, a tax break) which is now winding down to expiry. Those who wished to make use of the grant have now, apparently, done so. In Australia’s case, August new home sales reflect a similar approach of stimulus expiry, but we are still in the last-minute-rush phase. Notably, spring is the most popular season for home buying on either side of the world. Spring is well and truly passed in the high summer of August in the US, but still approaching in the late winter of an Australian August.
The US home sales figure belied what was an otherwise positive weekly jobless claims number. Economist consensus had weekly new jobless claims rising 5,000 last week after two weeks of falls, but instead they fell by a solid 21,000 to 530,000. Continuing claims fell to 6.14m, also more than forecast. These numbers were announced ahead of the open on Wall Street, sparking a 57 point jump in the Dow before 10am. This was not enough to close the gap to Wednesday’s close, meaning the aforementioned key reversal was not tampered with.
At 10am, the home sales number was released and the Dow dropped immediately to around what would be its closing price. Trading for the rest of the session was steady. The response in the broader S&P 500 was similar, although more pronounced. The buyers are still out there, but the sellers are not shy at the moment either. Wednesday’s sharp drop from the highs on Wall Street evoked only a small rise in the VIX volatility index. Last night’s fall – lesser on a close to close basis – evoked a 6% jump in the VIX to near 25. Put option buying is still in fashion.
One can always argue who it was that blinked first, but last night the US dollar jumped on the home sale news and rose 0.7% to 76.92 on its index. When fear returns the US dollar becomes popular again, and the stock market not so. The rise in the dollar sparked a substantial sell-off in commodities, thus helping to drive the stock market fall.
After a big fall on Wednesday, oil fell another 4.5% last night, or US$3.09, to US$65.89/bbl. This is near the lowest level in two months, and suggests oil’s flirtation with numbers over US$70 remains premature.
Base metals were set for some pretty big moves as well, given they had already closed on Wednesday before the weak reaction to the release of Fed statement. Aluminium and tin fell 2%, copper, lead and zinc 4%, and nickel 5%. Bellwether metal copper has been stuck in a range between US$6000/t and US$6500/t since early August, playing off a weak US dollar against falling physical demand. Last night’s dollar bounce saw copper break out of that range to the downside, reaching US$5928/t by the 7pm “kerbside” close.
The US dollar is currently highly susceptible to a sharp rally given the world is short dollars in the expectation of secular weakness.
Nor was gold spared, dropping US$14.40 to US$993.60/oz and smashing back through the magic number. Silver chimed in with a 3.6% fall.
The Aussie dropped close to another half cent to US$0.8647.
On the basis of recent US dollar movements, the US Treasury picked a good day to auction a record volume of seven-year bonds. There was solid demand for the US$29bn of longer dates, and foreign central banks accounted for 62% of the buying (albeit down from the 64% average of previous auctions). Foreign central banks simply have little choice but to lend the US money, but any dollar policy announcement from the G20 tonight will be interesting.
The key factor of the US second quarter earnings season, concentrated through July and August, was strong earnings on weak revenues, driven by aggressive cost-cutting. I have often since noted that the proof of the pudding will come in the third quarter result season, soon to be upon us, in which costs will already have been cut about as far as they can be. Will revenues have picked up in a more economically upbeat quarter? Or will we see earnings this time miss the mark of more optimistic Wall Street analyst consensus? And it will be October.
Last night Research In Motion – renowned Blackberry fruiterer – announced its second quarter result (RIM accounts in off-months). And it was a shocker. The result matched the Street on earnings per share but fell well short on revenue. RIM shares are down 12% in the after-market. The miss is significant, given the burden being carried by the US tech sector in general and the “smart phone” market in particular as a predominant source of US exports.
There was also some good after-the-bell news however. US food staple McDonalds announced an up-size to its dividend by 10%. Mickey D’s dividends are now available in “huge”, “ridiculously enormous”, and “omigod I can’t believe you’re actually going to eat that”.
As noted, yesterday’s trade on the ASX was influenced by options expiry and to that end probably not as weak as it should have been given Wednesday’s trade on Wall Street. Last night the SPI Overnight fell 50 points or 1.1%.
Tonight in the US sees the August new home sales numbers, along with the all-important durable goods number and possible statements from the G20.
As we enter the twilight of the September quarter, will the late buyers win out or will the sellers finally see a victory?
