The market sold off in the first 2 days of the week. After the initial sell off, the market could not pick itself up and remained tepid for the rest of the week. The volumes were missing in action once again. There were no convincing buying or selling effort from the investors and traders. The choppiness in the market had subsided in last week even though the market still rather volatile. The market was quite calm amid the volatility as if a storm is coming.

On Monday, the twice worst than expected result from the Empire State Manufacturing Index sparked a sell-off. Investors and Traders started to evaluate the sustainability of the rising market. The fall in the TIC Long-Term Purchases result also worried investors as the result show a huge amount of capital flowing out of the country. All in all, Monday was just a day for the investors and traders to profit take while waiting for more news to judge the health of the economy.

On Tuesday, the news was pretty mixed. The Housing Starts and Building Permits were pretty good. However, the PPI and CORE PPI were bad. The market reacted positively for the open but sold off in the afternoon. The sell off might have been triggered by profit taking, treasury yield increases and the concern of the strength of the economy.

On Wednesday, the market started off badly until the report from the crude oil inventories was released. The market then sold off due to the rather inline CPI data and the increase of deficit in the US current account. The larger than expected draw down from crude oil sparked the rally as the market saw it as a growth in economy due to the increase of oil spending.

On Thursday, the market was cheering the decline of unemployment claims even though it was higher than last week. The unemployment claim might not be a good indicator to judge the health of the economy as those people who make claims might have exhausted their claims (26 weeks). The better than expected news from the Philly Fed Manufacturing Index and CB Leading Index m/m further provided fuel to the rising market.

On Friday, the market surged up in the opening bell due to the spike in crude oil price amid concern about the situation in Iran. The surge in the market quickly faded as there were pockets of investors and traders concerned with the real demand of crude oil. There was no news to support any direction. The market ended up slightly above where it opened for the day. The “Quadruple Witching” day when contracts for stock index futures, stock index option, stock options and single stock futures all expire, might have inspired the late surge of the market going into the closing bell.

The market’s breath was quite bad throughout the whole week even though the market gained Wednesday to Friday. The market was quite stable into the closing bell as compared to the previous few weeks. The VIX Index was flat as compare to last week.

Major Events

• On Friday, the FDIC, bringing the total number of failures for the year to 40, closed Banks in Georgia, North Carolina and Kansas.
• Obama administration proposes an expansion of the Fed’s power over the economy.
• Growing tension in Iran.
• Missile Threat from North Korea
• The World Bank Predicted that the global economy will shrink 2.9%, a deeper falls than the 1.7% contraction it predicted in March.

Economic Data

This coming week, the market will be bombarded by economic data starting on Tuesday. The market will be looking at the Housing Data (Existing Home Sales, HPI m/m, New Home Sales), manufacturing data (Richmond Manufacturing Index, Core Durable Goods Orders m/m, Durable Goods Orders), Fed Meeting (FOMC Statement, Fed Rate), Employment and Economic Data (Weekly Unemployment Claim, Final GDP q/q, Personal Spending and Income m/m).

The Fed Fund rate should still remain the same however the market will be looking at the FOMC statement for the direction in the coming months. Recently the fed was being pressured to cut off the supply of money due to the concern of the huge national deficit.

Summary

This coming week will probably be a volatile week as the market digests the tons of economic data due. Speculators will still be in the picture as they thrive in the wild swings in the market. Investors are likely to profit take from the slightest bearish sentiment.

The frenetic last hour action, which was created by speculators and big market players, had slow down last week. Some of the speculative views were that most of the banks and major institutions were done with their secondary offering and others capital raising programs. Another speculative view was that the government had achieved the painting of a better economic future in the coming months by supporting the market.

The market will be watching the bond yield closely in the coming months. The 10 years yield was slightly positive last week even though the Fed was doing its best to scope up the bond. The growing concern about rising bond yields is its potential impact on the housing market, which will pass down its costs to the consumer, and thus affect the recovery of the economy. If the 10 year and 30 year yields remain at the 2008 or higher at 2007 levels, the recovery of the market will definitely be impacted.

The crude oil price continues to fluctuate violently between the level of 70 to 72 as its looked for news to break out of the 72 level. The price of crude oil did not break above the 72 level even when the tension had built up in Iran and on reports of renewed attacks on oil pipelines in Nigeria.

In conclusion, I am expecting the coming week to close negatively. This is due to the fact that people are starting to concern about the fundamental demand on the oil and the runaway stock market. The market should continue taking its lead from oil prices as the energy sectors contributed more than 20% of the raising market. (Conrad shares a slightly differing opinion but is in tandem with the downswing this coming week.)

Sector Rotation : Week 26/09

The Health Care was the only positive sector for the week as the market sold off. The Health Care (4.99%) led the market followed by Consumer Staples (-0.26%), Technology (-0.38%), Utilities (-0.51%), Consumer Discretionary (-1.07%), Financials (-1.07%), Industrials (-2.93%), Materials (-3.73%) and Energy (-5.53%).

The market sell-off last week was led by the Energy, Materials and Industrial sectors. This did not come as a surprise as these 3 sectors basically carried the market since April. It was clearly shown that funds were transferred to the defensive sectors (Health Care, Consumer Staple and Utilities) in the past few weeks.

The reform in the Health Care sectors will bring opportunities however not every company will be benefit from the program. It will be a sector for the future that needs careful research and planning. The good news is that the health care sector will not get the full blast from a bear market sell off.

Energy and Materials sectors are likely to lead the sell off in the market. These sectors have been running up without the real demand from the economy. The nature of Energy and Materials business were very speculative.

In summary, the market is likely to experience a pullback in the energy and materials sectors, which will lead to a sell off in the market. Keep an eye on the Consumer Discretionary sectors as it had went too far from its fair value.

Technical Analysis : Week 26/09

The S&P 500 Index closed at 921 last week. This indicates a fall of 25 points (2.6%) from the previous week’s close.

It was another week that belonged to traders and speculators. They once again dominated the market action as it was trading according to a technical point of view.

The market had a bad week considering the market had been running up for the past few weeks. The market threatened to break below the key support level 910 of S&P500 Index on Wednesday. The market did hold and made a reversal on Thursday while Friday was trading practically flat. This brings us back to the May trading range of 880 and 925 for S&P500 Index.

The market broke the upside trend on Tuesday. It threatened to climb back up on Friday, but failed and closed below the 925 levels. This basically sets up a revisiting of the important support 880 levels. The traded volumes remained light throughout the week. However on Friday, the volume was twice the amount compared to the past few weeks.

Looking at weekly candles, the S&P500 Index is suggesting a side downside trend for the coming week. The weekly candle chart shows an ugly shooting star formation, which means the buying sentiment has subsided.

Looking at daily candles, the S&P500 Index looks like it will either have a down or flat day on Monday. The daily candle shows a nice Doji, which signals a change of direction. If Monday closes down, then Tuesday will likely follow too.

The immediate support levels are S1: 900, S2: 880 and S3: 850.
The immediate resistance levels are R1: 925, R2: 950 and R3: 1000.

The Dollar Index (DXY) had increased slightly from 80.22 to 80.53 on weekly candles. Gold continued to fall from 941 to 936. Oil had been forcing it way above the 72 levels, however it had to settled at USD $70 for the week.

In summary, the market this coming week should be going down. Investors will likely take their profit and run. If the sell-off becomes too fast and too furious, then the market might trigger a frenzied run led by retail investors. The market this week will take their lead from all the economic data and the FOMC statement. Any disappointing data or news should create lousy sentiment as the market has a higher expectation as compared to a few months ago. The main leading indicator for the week will be crude oil. A fast selling off in crude oil prices and commodities prices will drag the whole market to hell. Stay Alert for the week.

[posted by Lawrence Chua]