After more than eight months, a dramatic weekly plunge has the market correcting and a few bulls repenting for certain. Entering Monday's session, the S&P500 ($SPX) and NASDAQ Composite ($COMPQ) are registering their worst five-session losses since 2003, as decliners of -4.41% to -5.85% have terminated the intermediate trend and made good on the promise that history does repeat itself.
An age old market lesson for overly aggressive bulls was finally realized this past week. However, the catalyst for the market's profit-taking plunge was an unlikely one, considering many other good reasons already in existence. For instance, kicking off the week, an octogenarian still holding clout on Wall Street threw the first jab at bulls. Former Fed Head Greenspan's remarks of a potential recession rattled investors intraday. But, like many other warnings gone unheeded, by day's end traders catching another pullback seemed to hold more credibility with the Herd on the Street than murmurs from a foreign land.
Unbeknownst to investors, a real curtain call for market bulls' was in the offing the very next day. Although Alan's prescient words may have precipitated the reaction and underlying shift in crowd psychology, whether realized or not. Tuesday's headline accusations pinpointed the bulls Achilles Heel as a precipitous bout of profit-taking in the Shanghai Composite Index. Overseas declines spearheaded by a -8.84% plunge in Shanghai set US equities up for their largest one day declines since 2001. Accompanied by record-breaking thrusts in the CBOE Volatility Index ($VIX) and the NYSE TRIN, concern was certainly apparent. As important, the bowing out and stage exit to the lower right quadrant of our monitors signaled a market already dressed for the occasion.
Profit-taking in Shanghai morphed into larger potential concerns for the US and global markets as the week progressed. For instance, hot financial markets such as Shanghai are also large users of Industrial and precious metals needed for economic expansion. With declines in those foreign indices spilling over into investor concern for those same economies, tumbling commodity prices in products like Comex Gold (IAU) [-5.93% weekly] and iShares Silver Trust (SLV) [-11.22% weekly] were the net result. That in effect, caused pressure in many related equities here in the US, as the negative side of globalization rippled through the markets.
Hedge fund operators and an increased aversion towards a popular trade quickly emphasizing risk rather than yield also helped shift market psychology towards the negative. The trade in question called the Yen carry trade involves borrowing capital on the cheap from the established Japanese market and using the proceeds to invest in higher yield, umm risky and less liquid, markets. Much like positions designed by other Wall Street based rocket scientists before them, the risk involved is typically underestimated, until fancy words such as âasset dislocation' are found to be convenient scapegoats.
Elsewhere, potentially negative catalysts garnered an increased awareness and / or respect by investors. Topics such as earnings deceleration, further mortgage industry lending woes (CFC, NEW, NFI, JPM, MTG, HBC) and inflation [core PCE deflator at .3%] all played a part to a lesser extent in the market's quick shift towards risk aversion. A weak January durable goods report didn't help matters, as the data revealed softer-than-expected business investment for the economy. However, market-related catalysts weren't all bad last week. Unfortunately, by the end of the day, or week actually, they weren't strong enough in their impact to make a difference for investors set on the business of profit-taking.
The best piece of data for the bulls came on Thursday morning. After a rocky start to the session, the February ISM Index, a gauge on national manufacturing conditions, came in at 52.3 and above estimates calling for a reading of 50. For an area of the economy which has shown more than its fair share of contraction evidence [most recently Wednesday's Chicago PMI], the first expansion reading in four months was a definitive rallying point for market bulls. Elsewhere, in a speech Friday morning, Fed President Poole dismissed increased chatter over a recession, elevated market valuations and miscalculations by hedge funds as being of concern for investors. Those reassurances did manage to quell the market during the session's first half, but were rather easily trumped by investors still obviously anxious to reduce positions riddled with increased event risk in front of the weekend.
ON TAP THIS WEEK
Negative investor sentiment and potential spillover regarding Asian markets / the now familiar Yen carry trade, sub and prime loan market anxieties and volatility in hard commodities and energy will set the stage this week. Whether those factors ease or not isn't known. As such, the expectation for more volatility in the broader averages is likely, but to pick a direction without some improved clarity on any or all of those fronts is not a strategy traders need to embrace just yet.
Earnings are all but over for the Q4 reporting season and potential market movers are nearly out of the equation this week. National Semi (NSM) and Hovnanian (HOV), for better or for worse, are considered to have the most potential on that front. For economic watchdogs, regularly scheduled catalysts are slightly more abundant. However, as last week's meltdown over the unforeseen or the overlooked is a testament, waiting on a number other than the kind directly related to our portfolios can be a rather difficult and costly proposition. For those so inclined, the big headliner will be the monthly jobs report to close out the week. With four potentially volatile sessions and plenty of leading concerns dictating the market, the always heralded report takes on a bit less meaning for traders interested in portfolio management.
Economic: ISM Services (57.5)
Earnings: OM Group (OMG), ABM Ind (ABM), ADC Tele (ADCT), Finisar (FNSR), Novatel (NGPS)
Economic: Productivity Revised (1.7%), Factory Orders (-4.0%)
Earnings: Allis Chalmers (ALY), Brown Forman (BF.B), Iconix (ICON), Volt (VOL), Chico's (CHS), Dick's Sport (DKS)
Economic: Weekly Crude, Beige Book
Earnings: American Eagle (AEOS), BJ's (BJ), Westwood One (WON), Coldwater (CWTR), Flamel (FLML), FuelCell (FCEL), Martek (MATK), Men's Wearhouse (MW), TiVO (TIVO)
Economic: Weekly Claims (335K)
Earnings: Alon (ALJ), Goldcorp (GG), Urban Outfitters (URBN), Comtech (CMTL), Hovnanian (HOV), Cooper (COO), Natl Semi (NSM), GMarket (GMKT), Georgia Gulf (GGC), TurboChef (OVEN)
Economic: Nonfarm Payrolls (100K), Unemployment (4.6%), Hourly Earnings (.3%), Trade Balance (-$60.0B), Wholesale Inventories (-.1%)
Earnings: Big Lots (BIG), Encysive Pharma (ENCY)
Figure 1: S&P500 ($SPX) Daily
Wounded bulls and probably a few technicians are inclined to see potential support for the broader indices. To a degree, they'd be right in anticipating that possibility. With the market's first corrective move in eight months underway and testing of price, MA and Fibonacci-based levels of notice front and center, monitoring the action certainly makes sense. Further, with short-term indicators oversold and fear gauges such as the CBOE Volatility Index ($VIX) and NYSE TRIN hit record-breaking levels of panic on Tuesday, there's further evidence to consider a potential reversal sometime next week.
While there's sufficient evidence for monitoring, the technical situation is still akin to catching a falling knife on both the daily and weekly perspectives. The daily chart of the S&P500 ($SPX) shows an undercut test of Tuesday's calamitous lows, in the form of a wide range Hammer. That's potentially good news for reversal and / or intermediate strategists. However, that event does require more confirmation within a very volatile and corrective environment. Combined with the current shift by investors' towards the negative eyewear, oversold can always escalate into further oversold conditions.
Heading into Monday, directional motives by this corner are being tempered by limited risk ideas that make use of the current increase in overall implied levels and less concerned about the hard delta. Preferences such as Bear Call spreads near resistance levels, Bull Spreads at oversold supports, front month bullish or bearish positioned Long Butterflies and Short Iron Condors are a few of the strategies that look to present opportunities in a market that's under correction. For bullish intermediate strategists looking for a foothold into the market, the use of the Follow-Through-Day or FTD might be considered. The strategy was addressed in Friday's Growth Stock report. In conjunction with an optionable strategy like those mentioned, that trading plan is thought to give traders a defined and smart approach to the directional decision.
Index or Sector Proxy
138.05, 136.20 - 137.50
142 - 144
41.75 â 42.25
43.80 â 44.50