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Nov 06
2008
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November 6, 2008 -
After the euphoria and history of the election of Barack Obama, the United State's first African American president, markets were quick to get back to the business at hand, ie. pricing in the negative effects of a prolonged recession into the market. There are probably lots of great things in store for the U.S. and world as we usher in a new president 2+ months from now, but the markets are looking at "now" and trying to see a glimmer of a light at the end of the long dark tunnel we are in at the moment.
After a pre-election multi-day "Rally-of-Hope" starting on October 27th culminating with the presidential election on Tuesday, the last two days have seen more blood in the water as the major indexes dropped precipitously for two consecutive days in a row resulting in the biggest two day slump since 1987. The market drop reflects the markets coming back to reality land in digesting mounting disappointment in corporate earnings and projections, and bleak sales data coming from major retailers fueling fear of a worsening economic downturn.
The
Standard & Poor's 500 Index fell 5 percent to 904.9, extending its two-day
loss to 10 percent. The Dow Jones Industrial Average retreated 443.48 points,
or 4.9 percent, to 8,695.79. The Russell 2000 Index of small U.S. companies
declined 3.6 percent to 495.92. The MSCI World Index of 23 developed markets
lost 6.2 percent to 921.87 highlighting what is going on in global markets.
The two-day tumble wiped out more than half of the S&P 500's rebound from a five-year low on Oct. 27. The S&P 500 is down 38 percent this year, the steepest annual retreat since 1937. The benchmark for U.S. equities has plunged 42 percent since its record in October 2007 as the U.S. economy shrunk in two of the last four quarters.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, climbed 17 percent to 63.88. The measure tracks the cost of using options as insurance against declines in the S&P 500.
About 481,000 workers filed initial jobless claims last week, the Labor Department said today in Washington, exceeding the 477,000 projected by economists surveyed by Bloomberg News. The number of people staying on benefit rolls was the most since February 1983.
Investors began to look ahead to Friday's jobs payroll data, which is expected to further underscore the weakening economy after weekly jobless claims fell but still showed serious labor market softness.
The Russell 2000 index of small caps actually outperformed most of the market today "only" shedding 3.64% closing at 495.93.
The European Central Bank and the Bank of England both reduced their key interest rates Thursday. The ECB dropped its target rate 50 basis points to 3.25%, and the Bank of England slashed its rate 1.5% to 3% underscoring the increasing concern in foreign markets.
Crude oil lost more ground and ended down $4.51 to settle at $60.77 a barrel. Gold dropped $10.20 to close at $732.20 an ounce.
Longer-dated U.S. Treasury securities were mixed. The 10-year note was higher by 2/32, yielding 3.7%, and the 30-year was declining 11/32 to yield 4.2%. The dollar was gaining on the euro and pound but falling vs. the yen.
What the Chart Says
Below is a chart of the Dow Jones Industrial Averages. As you can see, the recent rally went through a resistance level around 9400 and continued to the upper edge of the Bollinger Bands just below the 50 day moving average. There it bounced off that resistance and we began the current two day downturn. You can see in the chart that while stocks rallied during the last run, trading volume was declining indicating a weakness to the rally. From here we could see the market test the lower side of the bollinger band and the recent low resistance level at around 8175. The way the last two days have gone we might get there tomorrow. Below the most recent market lows the next major resistance level is the 2002 low at around 7600.
The oscillators used in the graph below all pretty closely caught the overbought tipping point on Tuesday before this two day slide and it looks like it still has some more sliding left to do at this point based on these indicators.
You can see that at the top of this latest rally the RSI bounced off the 50 mark, another sign of continuing market weakness. From our vantage there is not a lot of positive signs peeking up their heads from around the corner. We are likely in for a muted end to the trading year. It is likely that stocks will fall into a trading range for a period of time while consolidation takes place, volitility slowly subsides, and the government actions have time to work their way into the system and begin to have an effect. We are definately not calling a bottom to the market at this time as that may well not occur for some weeks or months down the road as the U.S. and global markets continue the process of deleveraging.
