Daily Market Reports | Mar 18 2010
By Greg Peel
The Dow rose 47 points or 0.5% while the S&P added 0.6% to 1166 and the Nasdaq gained 0.5%.
As has oft been noted, the 30-stock Dow Jones Industrial Average is a limited gauge of US stock market performance but we are all familiar with it as an indicator so attention is paid. The S&P 500 is the market's much preferred index, although a lot of weight is still placed on the Dow Transport index as an economic bellwether.
In recent trading the Nasdaq first crossed into new 2010 blue sky, followed by the Dow Transports and this week the S&P 500 with its break through the 1150 barrier. Last night the Dow Industrials also reached a new 2010 (and thus one-year) closing high at 10,733. The previous intraday high was set on January 19 at 10,763. Last's night's intraday high was 10,767 (up 82) so in theory two levels were breached last night, albeit the average slipped toward the close.
Suffice to say the break through the technical level of 1150 in the S&P has been met with renewed momentum, as if scripted. Early buying last night was attributed to a follow-through from Tuesday's Fed statement which said nothing new but again quelled those investors worried each month about a pending interest rate rise.
Adding to the relief was last night's producer price index reading for February, which fell 0.6% compared to expectations of a fall of 0.3%. The headline drop was all about energy prices, such that the core reading (ex food & energy) rose 0.1% – meeting expectations. In January the headline rate surprised with a 1.4% gain and the core with 0.3%, raising inflationary fears, so February's readings had a calming influence. Bernanke has constantly said rates can remain low because inflation will remain low, and this month the numbers are supporting his policy.
Volume nevertheless remains an issue on Wall Street. Last night's new high was achieved on disappointing volume as been the case for the last month. Experienced traders will tell you any significant market moves are undermined if they lack the conviction of strong volume. They are to thus be treated guardedly.
Weak volumes should not, however, be a great surprise. In 2008 the world dumped out of a large percentage of its equity holdings at a loss and moved into cash, which became the now famous “cash on the sidelines”. Volumes were unsurprisingly strong during that transition. But despite 2009's relief rally, those cash levels have not much fallen. Moreover, investors have shown a strong inclination to invest in fixed interest instruments – Treasuries for protection and corporate paper for yield – in recent times. Having experienced serious pain in equities the swing is back in favour of a more balanced portfolio.
The equity bulls take this on the chin because they know one day risk aversion will finally ebb to the point where equity investment is again the main investment driver. But how long might that take? The more immediate bulls are acting as if the GFC is now consigned to the history books and everything is rosy once more. But history shows it can take at least a couple of years to get over “crash” events, and so far 2009-10 is playing out in historical fashion.
When the world dumped out of its stock in 2008 it stood to reason that trading volumes thereafter would collapse, but they didn't. They didn't because of high frequency trading. Hedge funds use HFT to dart in and out of the market in less than the blink of an eye, employing super-computers loaded with trading algorithm software. HFT traders are ambivalent to market direction, but rather look to simply pick up a tick here and a tick there to garner incremental profits.
Post Lehman, HFT volumes in the US rose to levels of 70% of turnover and caused widespread outcry. But like it or loathe it, HFT provides liquidity in the market, and hence boosts volume levels. While HFT may not depend on market direction, it is very much requiring of market volatility to provide trading opportunities. From late 2008 and a year on, stock markets remained volatile.
But from late 2009 through to now, that volatility has abated. The VIX volatility index is back under 20. HFT trading has waned given reduced opportunity. Ironically, the rising popularity of HFT is self-defeating – added liquidity serves to smooth volatility.
In 2009, total average daily turnover in the US was 5.5bn shares. In 2010 year-to-date the average has been 4.9bn. But that average was front-loaded by the Greek Tragedy, and last night's new Dow high was achieved on volume of 3.4bn.
What we are seeing is simply a combination of all those previous equity investors still staying away, and opportunities for HFT trading also fading with low volatility. So does this latest move to a new high actually lack conviction? Or are we simply now just playing in a smaller pool?
The US dollar index ticked back up slightly last night to 79.72. But as noted yesterday, London base metals had to wait till last night to respond to the dollar's fall on Tuesday. Thus tin was up 1% and everything else around 2% last night.
Gold nevertheless pulled back after its big jump on Tuesday, losing US$8.60 to US$1119.60/oz.
Oil decided to keep on rolling however, rising another US$1.23 to US$82.93/bbl. Last night OPEC decided not to change its production quota, but this was widely expected. It's all meaningless anyway, given that at every meeting OPEC officials warn members to stick to quotas and then between every meeting those officials are totally ignored.
What supposedly spurred oil last night was an unexpected drop in weekly gasoline inventories despite a rise in crude inventories as expected.
The Little Aussie Battler continues to graft away to new recent highs. With a bit of help from a strong leading economic index reading locally yesterday, the Aussie added another half cent in 24 hours to US$0.9232.
The SPI Overnight was up 18 points or 0.4%.
Watch out tonight for US CPI.
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