FYI | May 12 2006
By Greg Peel
In the scheme of things, last night’s 1.2% fall in the Dow Jones Industrial Average was nothing overly spectacular – falls in excess of 1% are not uncommon, nor are rises – but it’s enough to give investors the jitters in a time when many are questioning the capacity for the market to sail ever upwards, particularly on the back of outrageous commodity price moves.
Yesterday FN Arena reported (US Equities’ Bear Signals) popular US market-watcher Dennis Gartman told his subscribers he had halved his US equity longs based on analysis from respected colleagues. The call was based on bearish signals provided by two factors – low volume and low volatility.
The recent upward run in the US markets has been achieved on surprisingly low volume. This tends to suggest a lack of commitment from the greater market. Furthermore, US markets have been exhibiting low levels of volatility (ie they have not see-sawed as much as usual, and it’s been four months since a 1% move) which tends to suggest a big move may be around the corner.
Well it was. The DJIA fell 142 points to 11,501, a fall of 1.2%. The S&P500 fell 17 points to 1, 306 (1.3%) and the Nasdaq fell 48 points to 2,273 (2.1%).
If a market is jittery it doesn’t take much to trigger selling, even if that selling is "profit-taking" rather than panic. In this case it was the Fed that provided the catalyst.
The world had been expecting the recent hike in US rates to be the last. But Chairman Bernanke hinted that inflation concerns meant the Fed’s tightening policy may not yet be over. If he needed any justification, he got it as oil rose overnight on the June futures contact by US$1.19 to close at US$73.32/bbl. Outages at US refineries added to ongoing geopolitical fears.
Inflation possibilities were again evident in commodity prices, as copper again set a record (and at one point was up 9% before settling back) and silver hit a 25-year high. Inflation spurred on gold as well, climbing to US$726/oz – a 26-year high.
Commodity prices rises were not enough to overcome general unease in the market as the US Energy and Materials sectors fell along with the broader market. Technology stocks were led down by a profit warning from Dell, and big falls were registered in Cisco and Google.
Whereas the recent rises have been on low volume, this was no thin market, vacuum-like fall. The New York Stock Exchange registered 1.83 billion shares changing hands, compared to last year’s daily average of 1.61 billion, and 2.46 billion shares traded on the Nasdaq against an average of 1.8 billion. Volume and volatility, it appears, made a comeback.
FN Arena also noted yesterday (Indicator In Trouble) that our "sentiment indicator" derived from the stock ratings of ten brokers/advisors had also sent a bearish signal. Accumulating Buy/Sell/Hold ratings, the indicator showed the number of Holds (or "Neutrals") in the database had fallen below 51%. Whenever this has occurred in the past four years, a correction has followed.
In yesterday’s case, the indicator had only snuck up to 51.02% before slipping back again, raising the question as to whether this slight move would still be a valid signal. Quite remarkable really.
The Aussie stock market will be an interesting place to be a fly on the wall today. Which pressures will win? Wall Street down heavily, inflation fears, higher oil prices, against higher gold and metals prices, and, well, higher oil prices. We might be in for some volatility of our own.