Daily Market Reports | Aug 27 2010
By Greg Peel
The Dow closed down 74 points or 0.7% while the S&P fell 0.8% to 1047 and the Nasdaq lost 1.1%.
As has oft been noted in this report, the Dow Jones Industrial Average is an anachronistic price average of a narrow selection of the “biggest” thirty US stocks. I qualify because the decision to add/remove stocks occurs only very infrequently even though those thirty are often usurped. The Nasdaq-listed Apple, for example, is actually the second biggest stock in the US at present after Exxon, but it is not in the Dow.
Serious market participants use the market cap-weighted S&P 500 index as the true indicator, largely ignoring the Dow. But tradition dictates that the Dow is the popular indicator, so it still has its place. And psychology dictates that a big round number like 10,000 is treated as significant.
The Dow had dropped below 10,000 twice this week intraday before recovering. In Wednesday's session a fall below 10,000 triggered buying despite further weak economic data. Last night saw another battle royale between the buyers and sellers to claim Hill 10K, but this time the sellers won. Yet only in the last 15 minutes did it slip from 10,030 to close at 9,985. Volume was again very light.
Wall Street had actually rallied from the opening bell on the back of a surprise drop in weekly new jobless claims. Why these volatile numbers are a surprise each week is anyone's guess, and right now the average economist couldn't pick his nose, but a fall of 31,000 to 473,000 was enough to provide some relief on the NYSE. This time last week Wall Street tanked when the weekly number went the other way to above 500,000 – another psychological level.
But what's one week in the dole queue? The reality is new jobless claims are up 4% in 2010 and up 11% since the beginning of July – not a positive trend. Indeed, despite last week's fall the monthly average actually rose by 3,250 to 486,750. Perhaps that's why the 40 point Dow rally didn't last long, and before we knew it we were heading south again. A weak Dallas Fed manufacturing number didn't help either.
The reality is that Dow 10,000 has become a coincidental inflexion point between the “oversold” school and the “hell in a hand basket” school. On Wednesday night I watched a US technical analyst explain on CNBC that the US dollar index was forming a big reverse head-and-shoulders pattern that suggested it was heading from the low 80s now to 100 eventually – a level not seen since 2002. The euro would thus go to parity from its current US$1.27. The chart was telling the technician that “obviously” some new crisis outside the US is about to occur that would affect a rise to 100. What that crisis would be is not known, but the chart suggests a crisis is certain.
And people wonder why I think technical analysis is a crock.
On the flipside, as an example, local economist Cliff Bennett is now calling a bottom in the market ahead of a strong rally, just as he did in early July and just as he did in March 2009.
There are many on Wall Street who'd rather be happy to sit it out until the November mid-term elections in which a swing to the Republicans in the Senate is expected to be the spark for a rally proper. On the other hand, the double-dip school is fired up over the recent relentless spate of weaker than expected US data.
All of the above is telling us something is going to happen in September but we don't quite know just what. That's why they call it a market.
From a very near-term perspective, Wall Street is looking to tonight for clues. Firstly, the first revision of second quarter GDP is due and the market reaction will depend on whether that revision takes us from 2.4% to above or below a consensus 1.4%. Secondly, Fed chairman Ben Bernanke is speaking tonight and Wall Street is expecting…well…something. He may downgrade the Fed's previous GDP forecasts, he may suddenly announce more quantitative easing, or he may disappoint by not changing anything.
That uncertainty possibly explains why gold fell US$3.70 last night to US$1236.30 despite the US dollar index falling 0.4% to 82.90. Both falls are perhaps evidence of a squaring up of positions ahead of tonight. The Aussie rose 0.3% to US$0.8866 on the dollar's move.
Yet all market reports are claiming the drop in jobless claims as the big impetus last night. Oil rose US82c to US$73.36/bbl, but base metals in London went berserk. Aluminium and nickel were up 1.5%, copper and lead 2.5%, zinc 3.5% and tin up 5.5%.
Tin's worth 5.5% more today because of US weekly jobless claims? Rubbish. In a base metal market currently impacted by short-term supply issues (mine collapses in Chile for example) and dominated by technical and speculative traders it was clearly short-covering which affected such moves.
Over in the now dominant bond market, the last auction for the week was the mostly heavily subscribed. The US Treasury sold US$29bn in seven-year notes at a record low yield of 1.989% and foreign central banks bought 57%. The same auction in July saw only 42%. You've really got to wonder why the rest of the world is still so intent on lending the US money, although a clue might be found in the PIIGS sovereign yields which have lately been drifting up again. Where else do you put your money for safe keeping? Gold is looking expensive again.
The SPI Overnight fell 36 points or 0.8%.
There'll be plenty of local earnings report action today ahead of tonight's critical announcements in the US.
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