Daily Market Reports | Jul 08 2010
By Greg Peel
The Dow rose 274 points or 2.8% while the S&P jumped 3.1% to 1060 and the Nasdaq also gained 3.1%.
I'd like to share with you a piece of copy from an old Overnight Report:
“The trigger was a memo to staff from Citi CEO Vikram Pandit. In it he stated that he was 'most encouraged' with how strong business had been so far in 2009, and suggested the first quarter is so far the best since the third quarter of 2007. January and February were profitable months, and the capital position is 'strong'. Indeed, given government backing, Citi is the 'strongest capitalized large US bank'.
“This came as a shock to Wall Street, which had assumed Citi to be as good as insolvent. Its shares have traded as low as US97c from their high around US$55 in 2007. Only last month, Citi was pre-empting further government capital injections and asking for a public stake of 40% in order to survive. It's no wonder Wall Street had assumed the worst.”
This piece comes from my Overnight Report of March 11, 2009, regarding Wall Street action on March 10. As we recall, the low was marked on March 9, but I didn't know that then. The piece refers to the “triggering” of a 380 point rally in the Dow. At the time it was largely dismissed as a snap-back, short-covering relief rally in an ongoing bear market. In retrospect it was the first session of one of the biggest bear market corrections in history.
Now here's a direct quote from a Dow Jones report last night:
“Boosting expectations for the second-quarter reports, money-manager State Street projected second-quarter profit well above analysts' forecasts, citing improving revenue trends. State Street, which isn't a Dow component, leaped 9.9%.”
And that was last night's trigger. There were no economic data releases.
I have made mention this week that conditions in the markets were beginning to feel a lot like March 2009. I have noted the RSI on the S&P 500 had hit a lower level than in March 2009, suggesting the market was more oversold now than it was then. I have suggested that perhaps the tide might be turning.
The problem with Wall Street rallies of such magnitude is that even the bulls find them unconvincing. Indeed, the bulls would have preferred a 74 point rally with a bit of volume behind it than a 274 point rally lacking supporting volume. Why? Because such a rally does not smack of “real” investors calling a bottom in valuation. It smacks or armies of computers geared up to cover short positions on technical triggers, it suggests accelerating delta hedge covering from short put positions, accelerating covering from leveraged short ETFs, and a battle royal between high frequency trading machines.
But all of that was said about March 10, 2009, as well.
The State Street news, coming the week before the second quarter earnings season begins in the US, was enough to ensure Wall Street had a positive morning session. The broad market S&P 500 conquered its 1040 technical level at 11am, met selling, tried again, met more selling, and tried for a third time. It was third time lucky and the sellers jumped out of the ring. Then a vacuum opened up and the market accelerated towards the close.
Looking at it in Dow point terms, it is very noticeable that 100 points up is hard work, but once confirmed a move to 200 points up is a bit easier, and if that's confirmed a move to 300 points up can happen pretty quickly. It basically means the humans have moved to the sidelines.
So after last night's session there are some bulls patting themselves on the back but others expecting more weakness yet. The bears are dismissive, suggesting we could have a few days of rally now but that would only provide a selling opportunity. Again, the same sort of talk was bandied around on March 10, 2009.
I'm not going to call it – I'm only pointing it out.
Europe is also dividing the market at present. European stock markets had big rallies on Tuesday and followed through last night with around 0.8% gains. All the current talk at present surrounds European bank “stress tests”, given it is the European banks which are particularly exposed to PIIGS sovereign debt. Those test results are due on July 23, but in the interim hints have been given that there won't be any problems, particularly among the big French and German banks. This is providing some optimism in Europe, as is talk from Greece that things are now looking a lot better than they did a few months ago.
But then there are plenty of disbelievers, those who suggest Greece will simply end up having to restructure its debt, that Spain is a real worry, that the stress test criteria are spurious, and that the market has a lot lower to go yet. The market is now awaiting the ECB's scheduled monetary policy statement tonight to see just what the central bank might be thinking on the matter.
That little bit more confidence in Europe also helped Wall Street last night. There wasn't a lot of currency movement, and the US dollar index slipped only slightly to 83.96. But the “risk indicator” currency had a big run, coincidental with Wall Street. The Aussie jumped a cent to US$0.8638.
I mentioned yesterday that US stocks could not rally when US bonds are not being sold. Well last night the ten-year bond yield rose 5 basis points to 2.98%. Stock market traders are keeping a close eye on bonds, and a break up over 3% in the ten-year would add to confidence.
And for the record, as well as the S&P blasting through 1040 to reach 1060, the Dow reclaimed 10,000, closing at 10,018. That's also psychologically meaningful, for what it's worth.
Gold traders also took the opportunity to exploit what they saw as oversold conditions, sending gold up US$9.10 to US$1203.20/oz.
Commodities were positive as risk was once again a good word. A positive revision for global oil demand by the Energy Information Agency assisted oil's 3% or US$2.09 jump to US$74.07/bbl. Base metals in London were all up 1-2%.
The SPI Overnight jumped 85 points or 2%.
Tonight we receive monetary policy updates from both the ECB, as mentioned, and the Bank of England. Incidentally, last night's final revision of the eurozone's first quarter GDP was unchanged at 0.2% growth.
Today in Australia we have the unemployment numbers. And obviously we will have some sort of a bounce. Is it March 2009 again? Or it could be just a blip. But then there does now seem to be a lot more interviewees on CNBC on the bearish side, with bulls hard to find, whereas in April this year there were lots of bulls, and the bears were few. That's a positive sign.
Realistically, it's all now up to the US second quarter reporting season. Alcoa kicks that off on Monday night.
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