Daily Market Reports | Mar 10 2010
By Greg Peel
The Dow rose 11 points or 0.1% while the S&P added 0.2% to 1140 and the Nasdaq gained 0.4%.
On Friday March 6, 2009, the broad market S&P 500 index hit an intraday low of 666, but bounced back to close at 683. On Monday March 9, the S&P did not create a new intraday low but it closed at 676. At that point the level of despondence and depression on Wall Street had reached a peak. It just felt like stock prices would keep falling forever.
And that's exactly the sort of attitude historically prevailing before a turning point. With the benefit of hindsight, we can recall that it's always darkest just before the dawn. There was a sliver of optimism when the S&P managed a Tuesday close of 719, but it took some time before Wall Street came to recognise that a bottom had been set that dour Monday. The smart money sells when the herd is buying with overblown abandon, but the smart money also buys when the herd is selling with overblown fear.
On March 9, 2010, the S&P has closed at 1140. That's a 68% rally in 12 months and the strongest 12-month gain in 75 years. On October 9, 2007, the S&P peaked at 1565 before falling 57% to the 2009 low. Despite the 75-year record, we have only recovered 52% of that fall at last night's close.
And now Wall Street is wondering what to do next. Over the past year there have been several small corrections in the rally, mostly of around 7%, with the most recent Greek-led pullback registering almost 10%. Any trader will tell you that such interim corrections are healthy in a bull market. But are we really in a bull market? Many investors have the misconception that if you're not in a bear market you must be in a bull market, and vice versa. This is not so. In the 1970s, for example, Wall Street suffered some violent swings and roundabouts but effectively went sideways for a decade. It was in neither a bull or bear market. Bull markets are that which we experienced from 2004 to 2007. Bear markets are that which we experienced from late 2007 to early 2009. The subsequent 68% bounce is just a recovery phase. We are not necessarily in a bull market.
Were we to continue pushing higher from here – for years – then again with the benefit of hindsight we could say that the bull market started in March 2009. But with the world still struggling to recover from the GFC, any bull market call at this early stage may yet prove ambitious. That is not to say we must instead go back down again. It is simply to say that, presently, we appear to be in more of a sideways drift than anything else. And last night on Wall Street was no exception.
The indices opened positively last night, leading the Dow to be up 60 points at lunch time. But volume was again light and as has been the case a lot lately, stocks drifted off again toward the close. We spent 2009 arguing about “cash on the sidelines” that must soon come in and drive the next bull market. But data from US mutual funds show that a lot of money has more recently been chanelled into the relative safety of bond funds, as well as left sitting in money market (cash) funds. Equity investment fell out of favour after the routing of 2008. It will be a while before US investors feel game enough to go back in the water.
Speaking of routs, Cisco last night unveiled its new router which the company claimed was a revolutionary step in information technology. Twelve times faster than previous fast routers, Cisco's new model delivers internet speeds of 100 gigabytes per second. Cisco shares did not surge on the news given the company had been buttering up the market for a while now.
What did surge were shares in the various US government backed financial stocks (zombies as some like to call them), being AIG, Fannie Mae, Freddie Mac and Citigroup. While AIG individually was boosted by talk of more asset sales, collectively the group rose on rumours the government was getting ready to take profits and get out.
Why would expectation of huge lines of stock coming onto the market spark rallies in those stocks? Because the other rumour is the government is planning to reintroduce a short-selling ban on those stocks in which it holds equity in order to protect the American taxpayer from front-running short sale opportunists. These stocks are amongst the most widely held in the market as shorts. As a result, AIG gained 12%, Fannie 7%, Freddie 8% and Citigroup 7% on short-covering. But as these stocks no longer have any market cap clout, they failed to much trouble the index scorer.
There were no economic data releases of note last night, but the US Treasury auctioned US$40bn of three-year notes. As a shorter end debt instrument, it did not surprise traders that the auction was well bid. (Note the current domestic popularity of bonds as mentioned above.) It was also a little comforting that foreign central banks bought 52% of the issue – down from the 54% running average but higher than the sub-50 levels more recently experienced in three-years.
The benchmark US ten-year bond settled at a 3.70% yield.
The US dollar index moved around a bit but finished only slightly higher at 80.59 (one year ago it was 89) resulting in small mixed moves from base metals in London and a US$1.60 drop in gold to US$1119.40/oz. Oil fell US38c to US$81.49/bbl.
The Aussie ticked up a bit more to US$0.9124.
The SPI Overnight gained 9 points or 0.2%.
Watch out today locally for Westpac's consumer confidence measure along with housing and investment finance readings.
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