Daily Market Reports | Jul 01 2010
By Greg Peel
The Dow closed down 96 points or 1.0% while the S&P fell 1.0% to 1030 and the Nasdaq lost 1.2%.
Strictly, the S&P 500 has now broken down in technical terms. A confirmed breach of 1040 and a close of 1030 confirms a bearish head-and-shoulders pattern, in theory. However there are three points to consider.
Firstly, not all technicians believe this particular head-and-shoulders pattern is extremely bearish. The peak of the right shoulder is lower than the peak of the left and the 200-day moving average is still in a positive trend. A truly bearish HAS pattern requires both shoulders to be even and the 200 MA to tip over.
Secondly, all anyone has talked about this past week has been a possible break of 1040 and the disaster it would portend. It is the nature of technical analysis that it often works because everyone expects it to. In other words, a break of 1040 in this case could spark panic selling which would then confirm the technical signal, which was confirmed because everyone went with it. Self-fulfillment.
The third point is the most interesting, and is exhibited by the following graph:
This is a graph of last night's movement of the S&P 500. The red line is Tuesday's close of 1041. Note that 1040 was breached from the opening bell but then the market recovered. It had a few more goes at it, recovering each time, until finally a breach at 3pm set a genuine sell-off in train.
Traders report a huge programmed sell order hit the market at 3pm. As we well know from experience, some players only enter the market in the last hour of any session. The programmed sell order used a computer to rapidly place sell orders across many, or perhaps even all, of the 500 stocks. It is quite possible the computer was programmed to trigger the orders if the S&P was below 1040 at 3pm.
Or was it programmed to create the actual break in the first place? And the situation is further complicated by last night being the last trading session of the quarter. It is not unusual to see heavy selling on the final day followed by a return to buying in the first week of the new quarter.
Either way, it is difficult to derive a definitive “take-away” from last night's close on Wall Street. It is true that the mood at present is one of concern over a slowing global economy, perhaps slowing into recession. But this mood could have been reflected any time up to 3pm. And there was not a lot in last night's data to inspire confidence.
The private sector ADP jobs report showed only 13,000 new jobs were created in June – well below expectation. This has forced economists to revise down their estimates for Friday's official jobs number, but despite the ADP, economist consensus has 115,000 private sector jobs being added in June. Subtract the 240,000 temporary census workers who's jobs ended in the month and the tip is for a net jobs report showing a loss of around 130,000.
The Chicago purchasing managers' index for June showed a drop from 59.7 to 59.1. When Wall Street is in a dour mood any such reductions are usually not well received. However, a reading of 59.1 is still very positive in this 50-neutral index of rate of growth of activity. Nevertheless, history shows that when PMIs begin to tip over, stock markets usually follow on a lag.
Today in Asia and tonight in the northern hemisphere see the monthly round of national manufacturing PMIs. Yesterday Japan released its number, which showed a fall from 54.7 in May to 53.9 in June. Again – a fall, but from a four-year high and still a positive number.
Last night, Moody's warned it may need to downgrade Spain's sovereign debt from AAA. While this sounds bad under the circumstances of a European debt crisis, the reality is Moody's is known for being late to any party. Standard & Poor's downgraded Spain several weeks ago and Fitch followed suit a couple of weeks ago. They both cited higher bond yields (ie higher cost of credit) and austerity programs as the reason for the downgrade. Well duh. Notably, when Fitch made its move recently markets were indifferent.
Indeed, there was actually good news out of Europe last night.
With the ECB's one-year emergency loans to European banks expiring tonight, and not being rolled over, European banks have been facing the daunting prospect of hitting the markets for refinancing all at the same time or taking up the ECB's new three-month emergency loans instead. Were the ECB to be flooded with demand for its three-month loans, the market could assume nothing other than European banks really are in serious trouble.
But economists had expected between 200-300bn euros worth of ECB credit to be snapped up last night, yet the figure was only 161bn euros from a total of 171 institutions. Europe breathed a sigh of relief, and the euro actually rallied against the US dollar. It is currently square, having been impacted since by the late sell-off on Wall Street. In the interim, Wall Street would have been positively influenced by strength in the euro. It's all chickens and eggs.
While the euro was stronger last night, the pound was weaker. Last night should have seen the release of the final reading for UK first quarter GDP, but the British Office for National Statistics postponed the release for two weeks citing “potential errors”. While errors might mean a revision either way, uncertainty is not a reason to buy a currency.
The net result was a US dollar index relatively steady at 86.05, but the Little Aussie Battler still managed to slip another 0.7 of a cent to US$0.8401 over 24 hours.
Gold was also relatively steady, adding US$1.60 to US$1242.40/oz.
While Tropical Storm Alex is tipped to reach hurricane status, it is also tipped to pass the coast well away from the Gulf oilfields. Oil was down US31c to US$75.63/bbl last night on weekly inventory data.
After their big drops on Tuesday night, base metals were mostly stronger on the LME last night for the quarterly close-out. Nickel and zinc both rose 3%.
The SPI Overnight fell 30 points or 0.7%.
Our Techwizard suggests a weekly close below 4175 in the ASX 200 would be a bearish signal. With a close at 4301 yesterday we look pretty safe for now as long as Wall Street finds no reason to completely tank tonight.
Happy New Financial Year. It is notable that for all the doom and gloom prevailing in the market at present, the Australian market provided an accumulated (dividends included) return of 15% for FY10. I'd take that any day.
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