The Overnight Report: Retesting The Low

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            [0] => ((RIO))
            [1] => ((NAB))
            [2] => ((TLS))
            [3] => ((AGL))
            [4] => ((NWS))
            [5] => ((REA))
            [6] => ((CZZ))
        )

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            [0] => RIO
            [1] => NAB
            [2] => TLS
            [3] => AGL
            [4] => NWS
            [5] => REA
            [6] => CZZ
        )

)

This story features RIO TINTO LIMITED, and other companies.
For more info SHARE ANALYSIS: RIO
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Consolidation

Once again, it’s a bit pointless to talk up yesterday’s gritty performance on the local market when Wall Street has tanked overnight once more.

Suffice to say, the ASX200 fell -38 points on the open before recovering through the morning, stalled for most of the afternoon, and then kicked slightly to the close to a 14 point gain. Unlike the prior few days of mayhem, sector movements were not uniform but divergent. There were sectors to buy, and sectors to sell.

The obvious sells were energy (-1.8%) on a sharp fall in the oil price and materials (-0.7%), on general falls in commodity prices, albeit not iron ore, and despite Rio Tinto ((RIO)) showering its shareholders with late Christmas presents.

Resource sector falls were balanced out by a 0.8% gain for financials, following a well-received quarterly update from National Bank ((NAB)).

Telstra ((TLS)) is quite simply a hero one day and a villain the next, for reasons known only to those trading it, and yesterday telcos jumped 1.3%. AGL Energy’s ((AGL)) -2% fall post results release dragged utilities down -1.3%.

It all means little nonetheless, with Wall Street plunging back to its previous low.

Critical Level

As I had suggested, any Wall Street rebound off the lows set early in the week would be met with selling for one reason or another. The US market is continuing to follow the script. A retest of the low following an initial rebound is text book stuff.

In Dow terms, Monday saw an intraday drop of -1600 and a close of -1175, and then Tuesday saw another -500+ point drop before the turnaround, which ensured a positive close on the session. That early Tuesday drop set the low.

On two occasions last night the Dow fell to be down -700 before rebounding, and then falling again. The third time around, it failed to hold.

Looking at the “real” indicator, the S&P500, the equivalent low set on Tuesday was 2593. This was breached in the very last minutes of trade, for a close of 2581.

The question now is: has the previous low been broken? In strict points terms it has, but a few points here and there are not necessarily significant. It will come down to whether the buyers come in from the open tonight, or investors panic and the selling continues.

If the selling continues, the next port of call could well be the 200-day moving average on the S&P, which as of last night was 2509. That’s another -2.8% down, and would represent a -12.6% correction from the all-time high set last month.

It would appear the culprit at this time remains the short volatility play that few knew about prior to this week and now everyone is in shock about. Having fallen back down into the 20s, the VIX volatility index on the S&P is back up at 35. This has forced holders of this leveraged inverse VIX exchange traded note, the XIV, to sell stocks once more.

It is a feedback loop, as I noted earlier this week. As the market falls, investors seek protection in put options which pushes up the VIX. As the VIX rises, holders of the inverse VIX need to sell stocks to cover. They force the market lower, the VIX rises further, more stocks need to be sold…

And it’s not humans placing the orders. This trade has a mind of its own. That’s why we saw the Dow drop from -1000 to -1600 in a matter of seconds on Monday night. And likely why we saw a sharp acceleration to the downside on the close last night.

Hands up if, prior to 2008, you had heard of subprime lending, CDOs or CDSs. Now keep your hand up if you understood them. Anyone? The exacerbating factor in 2008 was that investors were being trapped in a world they didn’t understand. Now we have a leveraged inverse VIX ETN that is not the cause of the initial selling – that’s inflation fear – but an instrument that might single-handedly turn what might have been a healthy -5% pullback into complete carnage.

Besides hardly anyone having heard of this ETN before this week, no one knows, outside of the instrument’s sponsor, just how big the initial position was. Just how much selling is required before this thing is finally cleared out?

It may well be this question that determines whether Wall Street opens lower again tonight, or whether all those traders and fund managers who have appeared on business television this week shouting “great buying opportunity” actually put their money where their mouths are.

It may be that they see no need to rush, and perhaps an even better buying opportunity will present.

Commodities

As US stocks saw another round of volatility last night, the US ten-year yield rose up to 2.89% and then fell back to 2.85% once more. The US dollar index rose and fell in lockstep, and is now little changed on the day at 90.26.

We thus see comparatively benign moves in metal prices, including gold, overnight.

Not so for oil however, which is more about supply-side issues than simply the currency.

This is weighing on the Aussie, which despite a flat greenback has fallen another -0.5% to US$0.7789.

Today

The SPI Overnight closed down -131 points or -2.3%. That would take the ASX200 below support at 5800. If so, the next support level is 5650.

Locally we see housing finance numbers today, and the RBA publishes its quarterly Statement on Monetary Policy.

China releases inflation numbers today.

The local results season today gives us numbers from News Corp ((NWS)), REA Group ((REA)) and Capilano Honey ((CZZ)).

The Australian share market over the past thirty days…

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