August
11th 2008 Edition
Weekly review of the
markets
Last week
Last
week was announcing a continuation of the bear trend but the proximity of the
support for the S&P 500 and the NASDAQ and the absense of significant
econimc news in the early part of the week let us hope for rebond.
Tuesday, after a
negative start, the market found some comfort in the economic indexes who brought in some good news. The ISM (
manufacturing) went back over 50, level where it is considered to be
expending. Construction expenses continued to shrink by 0.4% but we were
expecting a 0.6% decline. The optimism was short lived and after a brief bullish push, pessimism
came back like a bad rash following a deterioration of the Israel/Iran state, tensions which could have an impact on
oil production. GM saved the day when they announced a reduction of 8.3% vs.
the expected 21%. It was a volatile day to say the least but we managed to end
the day up.
Wednesday gave us a
positive opening but it didn’t last. Oil came back close to its last record at
$143.58, Merril Lynch
downgraded GM and its price target while Oppenheimer lowered its estimate for Merril Lynch’s revenues. At the
end of the day indexes found themselves 20% lower than its record levels last
October.
Thursday was a shortened
trading day because of the Independence day holiday
but still was important since it was bringing employment data. Unemployment
exceeded expectations (5.5% vs. 5.4%). A little better than expected on the job
creation front. The ISM (service) disappointed breaching the 50 level at 48.2 vs 51.7 last month. These latest numbers didn’t create much
has the major indexes remained unchanged but still was a negative week which
was the 5th consecutive down week for the NASDAQ and the S&P500.
This Week
Last
week didn’t help the mood on Wall street to say the least. Oil price continues
to rise and it seems any news pushes it up somehow. Although it seems inflation
didn’t filter out of the energy sector the continuous rise in its price is
making everyone very cautious. Economic growth is anemic at best…
This
week no major economic news are expected all week thus the price of oil will
still lead the way and techninal analysis will be the main tool investors will
have to rely on. ( see below for details on the few economic news that you’ll
still want to check out)
Technically,
to have a better idea of the magnitude of the bearsish trend we are into we need to look at a weekly chart over 4
years. For the S&P500 the situation is nothing short of critical. A huge
bearish triangle is forming with base of 325 points. Its base is around 1250, a
level it touched on last week. Theoretically, if that base is breached, this
index could over the next year fall below 1000. It is very important that we
break the bearish trend and bounce back up from the 1250 level.
The
Dow Jones is not reassuring either. It’s almost certain that it will find some
support at11000 but a break of a major triangle that has a base of 2750 points
let’s us think a pullback is the nest we can hope for which will be folowe by a
contiuation of the downward spiral. The slight possibility a bull wedge might
be forming (blue figure) allows us to remain hopeful this latest figure could
invalidate the “darker one”.
The
NASDAQ seems to be the one with the best support at this time. At 2200, we see
a convergence of two support lines. This support predicts a rebond albeit we
are in the presence of a symetrical triangle here with a base of 675 points.
The implications a breach below the base have are very important.
In
conclusion, just like last week, the proximity of major support lines and the
oversell condition of the market is letting us hope the coming week could be
positive but don’t forget the overall picture is still bearish so it might be
an ideal week for some quick trades. Amongst other beaten down sectors, I’ll
personally look for the financial market to gain a lot if the market turns
positive…
Economic calendar
(Reports I consider will impact the market the most with definitions and
expectations)
Tuesday
Pending Home Sales Index
10:00ET
Consensus -3%
Definition
TThe National Association of Realtors developed the pending home sales index as
a leading indicator of housing activity. As such, it is a leading indicator of
existing home sales, not new home sales. A pending sale is one in which a
contract was signed, but not yet closed. It usually takes four to six weeks to
close a contracted sale.
Why Do Investors Care?
This provides a gauge of not only the demand for housing, but the economic
momentum. People have to be feeling pretty comfortable and confident in their
own financial position to buy a house. Furthermore, this narrow piece of data
has a powerful multiplier effect through the economy, and therefore across the
markets and your investments. By tracking economic data such as the pending
home sales index which measures home resales,
investors can gain specific investment ideas as well as broad guidance for
managing a portfolio.
Even though home resales don't always create new
output, once the home is sold, it generates revenues for the realtor. It brings
a myriad of consumption opportunities for the buyer. Refrigerators, washers,
dryers and furniture are just a few items home buyers might purchase. The
economic "ripple effect" can be substantial especially when you think
a hundred thousand new households around the country are doing this every
month.
Since the economic backdrop is the most pervasive influence on financial
markets, home resales have a direct bearing on
stocks, bonds and commodities. In a more specific sense, trends in the existing
home sales data carry valuable clues for the stocks of home builders, mortgage
lenders and home furnishings companies
Wednesday
EIA Petroleum Status Report
10:35 ET
Consensus -7M barrels
Definition
The Energy Information Administration (EIA)
provides weekly information on petroleum inventories in the
Why Do Investors Care?
Petroleum product prices are determined by
supply and demand - just like any other good and service. During periods of
strong economic growth, one would expect demand to be robust. If inventories
are low, this will lead to increases in crude oil prices - or price increases
for a wide variety of petroleum products such as gasoline or heating oil. If
inventories are high and rising in a period of strong demand, prices may not
need to increase at all, or as much. During a period of sluggish economic
activity, demand for crude oil may not be as strong. If inventories are rising,
this may push down oil prices.
Crude oil is an important commodity in the global market. Prices fluctuate
depending on supply and demand conditions in the world. Since oil is such an
important part of the economy, it can also help determine the direction of
inflation. In the
Thursday
Jobless Claims
08:30ET ET
Consensus 399K
Definition
New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market. The four-week moving average of new claims smoothes out weekly volatility.
Why Do Investors Care?
Jobless claims are an easy way to gauge the strength of the job market. The fewer people filing for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy. Nearly every job comes with an income that gives a household spending power. Spending greases the wheels of the economy and keeps it growing, so a stronger job market generates a healthier economy.
There's a downside to it, though. Unemployment claims, and therefore the number of job seekers, can fall to such a low level that businesses have a tough time finding new workers. They might have to pay overtime wages to current staff, use higher wages to lure people from other jobs, and in general spend more on labor costs because of a shortage of workers. This leads to wage inflation, which is bad news for the stock and bond markets. Federal Reserve officials are always on the look out for inflationary pressures.
By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked jobless claims and adjusted their portfolios to anticipate these events.
Just remember, the lower the number of unemployment claims, the stronger the job market, and vice versa.
Friday
International Trade
08:30ET ET
Consensus -62.8B
Definition
The international trade balance measures the difference between imports and exports of both tangible goods and services. Imports may act as a drag on domestic growth and they may also increase competitive pressures on domestic producers. Exports boost domestic production.
Why Do Investors Care?
Changes in the level of imports and exports,
along with the difference between the two (the trade balance) are a valuable
gauge of economic trends here and abroad. While these trade figures can
directly impact all financial markets, they primarily affect the value of the
dollar in the foreign exchange market.
Imports indicate demand for foreign goods and services here in the U.S. Exports
show the demand for
Consumer Sentiment
10:00 ET
Consensus 56.9
Definition
The University of Michigan consumer surveyquestions 500 households each month on their
financial conditions and attitudes about the economy. Consumer sentiment is
directly related to the strength of consumer spending. Consumer confidence and
consumer sentiment are two ways of talking about consumer attitudes. Among
economic reports, consumer sentiment refers to the
Why Do Investors Care?
The pattern in consumer attitudes and
spending is often the foremost influence on stock and bond markets. For stocks,
strong economic growth translates to healthy corporate profits and higher stock
prices. For bonds, the focus is whether economic growth goes overboard and
leads to inflation. Ideally, the economy walks that fine line between strong
growth and excessive (inflationary) growth. This balance was achieved through
much of the nineties. For this reason alone, investors in the stock and bond
markets enjoyed huge gains during the bull market of the 1990s. Consumer
confidence did shift down in tandem with the equity market between 2000 and
2002 and then recovered in 2003 and 2004. Consumers became more pessimistic in
2005 when gasoline prices surged.
Consumer spending accounts for more than two-thirds of the economy, so the
markets are always dying to know what consumers are up to and how they might
behave in the near future. The more confident consumers are about the economy
and their own personal finances, the more likely they are to spend. With this
in mind, it's easy to see how this index of consumer attitudes gives insight to
the direction of the economy. Just note that changes in consumer confidence and
retail sales don't move in tandem month by month.
Treasury Budget
14:00 ET
Consensus: 23.7B
Definition
The U.S. Treasury releases a monthly account of the surplus or deficit of the federal government. Changes in the budget balance of the annual fiscal year (which begins in October) are followed as an indicator of budgetary trends and the thrust of fiscal policy.
Why Do Investors Care?
The budget data have several direct and indirect meanings for the financial markets. The most direct relationship lies between the size of the budget deficit and the supply of Treasury securities. The higher the deficit, the more Treasury notes and bonds the government must sell to finance its operation. From there it's simple supply and demand -- if demand is constant but the supply of bonds goes up, the price goes down. The same is true if the deficit falls or is eliminated altogether -- the government needs to sell fewer Treasury bonds, so the supply drops and the price of T-bonds rises. In the past few years, the budget deficit has increased dramatically, and this has put more Treasury securities into the market place.
The Federal government borrows money through the issuance of Treasury securities; so higher deficits mean a larger supply of securities and (again, assuming constant demand) lower prices. With notes and bonds, lower prices are equated with higher yields, so in this example, the government borrows money at higher interest rates. That impact ripples across all other interest rate-bearing securities and creates a higher interest-rate environment for stocks, which is bearish.
In addition to following the trend in the budget deficit or surplus, investors can gain valuable insight to the state of the economy by looking at the government's tax receipts. Higher tax receipts lead to an improved deficit situation when economic conditions are strong; conversely, lower tax receipts reflect a sluggish economic environment.
p>Here’s a snapshot of it all:
That’s it for the economic
calendar this week.
Yours
truly,
www.trading-and-investing-for-beginners.com
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