Daily Market Reports | May 05 2009
By Greg Peel
The Dow closed up 214 points or 2.6%, matched by the Nasdaq with a 2.6% jump, but the S&P surged 3.4%.
Yesterday in Australia the ASX 200 opened above the 3779 January high after a positive lead from Wall Street. Having tried so many times to breach that number, it was always likely that a clear breach would signal a fresh leg up. Well, we certainly made an impressive start. Positive Chinese manufacturing data fuelled strong rallies across the Asian region, and a bit of carbon relief for the miners added to the euphoria in Australia. We are now up 23% from the March low and in clear positive territory for 2009.
Last night the surge in the S&P 500 took the US broad market index to 907, passing the December 31 close of 903. Therefore the S&P is now in positive territory for 2009, though a January high of 934 still awaits. The S&P has had to rally 33% from the March low just to get this far. At 8426, the Dow is still 350 points shy of being positive for 2009 and 608 points shy of breaching the January high. But the Dow has been burdened by the likes of the big banks and GM, and previously AIG.
The bulk of the rally last night on Wall Street was booked by 11am. The market went sideways for most of the day before kicking on the death. Those waiting for a late sell-off to get in were obviously forced to scramble. Wall Street, too, was elated by the Chinese manufacturing data, but there was more to come on the local front.
The National Association of Realtors’ pending home sales index jumped 3.2% from February to March having risen only slightly in February. Economists had expected only a 1.0% gain and the move puts the index up 1.6% year-on-year. With the US housing market having been the root of the GFC, this news has been very well received, although the unconvinced point to the US$8000 tax break offered to homebuyers, the mortgage rates which have been forced down by Fed buying, and the still extensive inventory of homes to work through.
Assisting the reduction in inventory is a continuing fall in residential construction spending. It fell 4.1% in March but the good news was that non-residential construction rose 2.0% in March. This pushed the total construction spending index to a 0.3% gain for the month – the first monthly gain in six. Year-on-year however, construction spending is down 11%. But a positive result can only be good news.
The suite of positive data was enough to fuel last night’s rally and as the day progressed, more good news kept it there.
The bank stress test results might be not out until Thursday, having been delayed from Monday, but that clearly hasn’t stopped insiders being given a few preliminary indications. The White House commented that it didn’t see a need right now for the administration to have to go back to Congress for more TARP funds, implying the stress tests might be indicating no need for too many more capital injections. This is positive.
On the other side of the fence, both Citigroup and Bank of America are working on plans to each raise a fresh US$10bn in capital from the market following preliminary findings of the stress tests. These two have been voted most likely to need more help from the government, but they have stated an intention to argue with the government that the stress test criteria were too harsh. If, however, they can raise their own capital then they will avoid any further “nationalisation”. All US banks want to pay back their TARP injections swiftly in order to release themselves from accompanying restrictions.
Last night the US bank index jumped nearly 15%. This is bold ahead of stress test results, but one feels there’s a bit of strategic leaking going on. While the results may look good on Thursday rather than bad, there could still be a bit of “sell the fact”.
The latest bout of stock market euphoria has meant a switch out of the sanctuary of US Treasuries and back into the scary world of risk. This is negative for the US dollar, and the dollar index took a bit of a hit last night. The Aussie was up a cent to US$0.7403.
The fall in the US dollar was also enough to send gold up US$14.60 to US$899.60/oz. The interesting thing about this move is that while it is normal for gold to move inversely to the US dollar, it would have been no surprise if last night gold fell US$14.60 instead. If the market is bailing out of the safe haven of US Treasuries it should also be bailing out of gold. As we fly closer to the sun, are investors buying gold ahead of a perceived pullback in stock markets to come? Or has everyone who wanted to sell out of the gold safety already done so, leaving only the US dollar and inflation trade as an influence?
Oil rose US$1.47 to US$54.47/bbl last night on the back of the weaker greenback. It is again interesting to note that a year ago, the stock market fell whenever the oil price was strong, but now the oil price rises whenever the stock market is strong.
There was no base metal trade last night as London was closed for the bank holiday.
The SPI Overnight jumped 75 points or 1.9%.
Given the rally on Wall Street included a positive contribution from the China data, one has to assume there is a risk of double-up in the SPI Overnight’s response. Although 1.9% is well short of the S&P’s 3.4% gain.
One thing to note about yesterday’s big rally in Australia is just how much selling was going on over the last two weeks as the ASX 200 battled to get through the January high. This implies a lot of shorting was going on by those believing the bear market rally had run its course, and that means yesterday involved plenty of short covering. It certainly felt that way.
It has been noted on Wall Street in particular that all through this 33% rally, daily trading volumes have never been particularly strong. If anything, they’ve been rather poor and were again last night. Historical observers will tell you that a bull market does not begin on low volume. It must have the support of the whole market and show some high levels of turnover at the lows before backing that up with strong volumes on the recovery. The rally on Wall Street has had elements of extensive short-covering from the shorter term players, but also noted pension fund buying. The latter is a positive, but pension funds look to the long term. Missing from the equation have been the retail investors – those of a more medium investment horizon. Without the support of retail investors this rally cannot be claimed to be a bull market unless suddenly volumes surge, implying retail investors have decided they’re missing out.
The implication here is that we are still very much in a bear market rally, and the harder and faster we run up, the more chance of another spike down. Yet we must also consider two points: (1) if everyone believes it is only a bear market rally, then it won’t be, and (2) if everyone believes it is a bear market rally before a pullback that might make for a good buying opportunity, then it can’t pull back very far.
It also has to be noted that bear market rallies can mark 40%, 50% even 60% retracements of the fall from the high, and have done throughout history, before the bear trend resumes once more. This would take us back to 5000 in the ASX 200 which was the break-down point late last year.
This skirmish is far from over.