Market Analysis : Week 21/09
The bear has awaken to spring multiple attacks on the bull! The market reversed the uptrend that started in Mid March with the Dow Jones Industrial Average falling 306 points to close at 8268 (3.6%), followed by the S&P500 Index plunging 47 points to close at 882 (5%) and the Nasdaq Composite falling 59 points to close at 1680 (3.4%).
The market had a negative week as the bears were looking for any excuse to trigger a sell-off. On Monday, the market experienced a huge sell-off due to profit taking. Tuesday saw the market take a plunge initially before it recovered some ground and closed flat, betting that the next day’s retail sales will be a good. On Wednesday, those speculators got smacked in their faces as the retail sales result was worse than expected. The dismal retail sales result triggered a wave of sell-offs which caused investors and traders to panic. This led to further sell-offs later in the week. On Thursday, Wall Street cheered on good earnings from Wal-Mart and other retailers. However the joy did not last long as investors and traders were looking for every opportunity to lock in their gains especially after the dismal retail sales result on Wednesday.
Last week, it seemed that there were increasingly more investors and traders closing their positions and selling into the rally. The investors and traders are looking for reasons to stay on a bullish course but it seems that the market is losing its ‘green shoots’ (good economic data/better-than-expected earnings) looking ahead in the weeks to come. The dismal retail sales result provides a strong argument for the bears to short sell the market. The bulls saw it as a good excuse to lock in their profits.
Recently there was a big surge in secondary stock offerings from the market. The banking companies have been actively offering secondary stock amidst this bear market rally to raise capital. The activity will no doubt send a clear signal that investors are willing to take more risk and this is likely to benefit the stocks in the long term. However the risk of secondary stock offering is the dilution of the current stock, which will put pressure to the stock price in the short-term. Overall the increase in the activities will also likely trigger more sell-offs in the market in the coming week.
The market’s breath was negative throughout the week. The internal indicators showed extreme bearishness as decliners clearly outpaced advancers by at least a 2:1 ratio. The short covering activity had stopped for the week as it evident in that the last hour action that was quite stable unlike the previous few weeks. The last hour action in the coming week will be very interesting as it might show latecomers in this rally getting slaughtered by margin calls.
The VIX, a measurement of the market risk/fear factor, increased slightly from 32 points to 33 points. The slight increase in the VIX suggests that the market is getting used to the this kind of volatility. It also suggests that the market’s risk appetite has been quite stable even when the market takes a dip. The market had been getting greedy in the past few weeks following the so-called market bottom on March 9. This extreme greed might just be the catalyst to fuel the next extreme fear in the market. This will be clearly shown in the VIX in the near future. Overall, the market should continue to trade in the range of 33 to 35 in the coming week. A spike above the 35 level will trigger a massive sell-off in the market as fear returns to grip the market yet again.
Major Events
U.S. consumers pulled back again in April as retail sales dropped a seasonal 0.4%, the eighth decline in the past 10 months, the Commerce Department estimated.
U.S. foreclosure filings rose to a record in April, affecting one in every 374 housing units. Bank repossessions, in particular, may spike in the next few months, RealtyTrac reported.
Microsoft Corp. pulled in $3.75 billion from its first-ever long-term bond offering last Monday, raising money that may go towards funding a large share buyback and possibly acquisitions.
Economic Data
This coming week, the economic data will be quite light. The whole week will be focused on the May housing market index from the National Association of Home Builders, April housing starts and building permits, minutes of the Fed meeting from late April, weekly jobless claims, Philly Fed manufacturing index for May and lastly Fed Chairman Bernanke will deliver a speech on Friday.
Earnings
The Q2 earnings season has officially come to an end with 461 S&P500 companies having already reported earnings. This coming week, another 16 S&P500 companies will report, including the last two of the Dow Jones Industrial Average components: Home Depot and Hewlett-Packard.
Their earnings result should be better-than-expected. However expect some more downside guidance and missed revenues.
Summary
Overall the market should continue its sell-off as investors and traders continue to lock in their profit. Short sellers and the fear sentiment in the market may trigger new waves of selling too. Financials are likely to pressure the stock market as more banks make secondary offerings in the coming week. The Housing sector might just take a correction after the cooling-off of the housing data. Technology, Consumer Discretionary and Retail sectors will also have downward pressure as profit taking will resume heavily in the coming week.
I am expecting the market to experience a mild to heavy sell off this week. Bad economic data and the weakness in the Technology sector will be the catalyst for huge sell off.
Sector Rotation
Last week, the bears were in rampage mode as Consumer Discretionaryled the charge with a -6.11% loss followed by Financials (-5.95%), Energy (-4.5%), Industrials (-4.43%), Utilities (-4.39%), Materials (-2.20%),Technology (-1.98%), Consumer Staples (-1.24%) and Health Care (0.72%).
The top 3 sectors of the year continue to show further signs of weakness last week. Consumer Discretionary was the top decliner for the first time in many weeks. This is clearly a sign that the consumer market still remains weak.
Health Care is the only sector in positive territory as it is perceive as a safe haven. It is likely to gain strength as investor and traders are shifting their funds to safe havens for the coming months.
Safe Haven sectors like gold and educational companies are also likely to benefit as the market searches for a safe place to park their cash amidst the uncertainly in the market.
In summary, the Consumer Discretionary, Technology and Financial sectors will continue to sell-off for the next few weeks. Consumer Discretionary should lead the charge to the downside if housing data is dismal and the earnings guidance from Home Depot and Lowe are bad.
Technical Analysis
The S&P500 Index closed at 882 last week. This indicates a plunge of 47 points (5%) from the previous week’s close.
The market was down throughout the week except for Thursday as bargain hunters (those who missed out the recent rally) come into the market to scoop up some of the stocks that have consolidated for a few days. The market sold off heavily on Wednesday because of the worse-than-expected retail sales data in April. On Friday, the market continued to wash out even though the economic data came out slightly better-than-expected.
Last week, the last hour of market action had been very negative. The market ended negative or lower at the end of the trading session, suggesting that the institutional players had been selling into the rally and traders might be short selling some of the stocks that are about to crack.
Looking at weekly candles, the S&P500 Index is suggesting a downside for the coming week. The Bearish Harami pattern indicates a high possibility of a sell-off in the market.
Looking at daily candles, the S&P500 Index looks like it will have some downside on Monday. An ugly Bearish Harami formed last Thursday and Friday to suggest a possible gap down below 880 which could signal a heavy sell-off in the coming week.
The immediate support levels now are S1: 880, S2: 870 and S3: 850.
The immediate resistance levels are R1: 895, R2: 910and R3: 930.
The Dollar Index (DXY) has dropped from 83.8 to 82.9 on weekly candles. The dollar index might just continue its free fall as more inflationary pressures kick in. Gold has steadily risen for the past few weeks. It went to 931 from 914 from the last week. Oil remains unchanged from last week as it failed to break above the 60 levels.
In summary, this coming week, the market should experience a mild to heavy sell-off. There are hardly any reasons for the market to go higher except for the more-than-$5 trillion sitting on the sidelines of the money market fund, aching to get in on some unlikely late action.
[by Conrad Lim]
Recent Comments