Further sub prime woes headlined the risk-averse investors muscle behind a red weekly tape. However, with March Madness upon us, a new offensive game featuring da Bulls might be waiting in the wings. For the five-day period the NASDAQ Composite ($COMPQ) and S&P500 ($SPX) are off -.62% to -1.13% on heavier levels of expiration-related madness, now removed from the worlds greatest game.
Just when it looked like investors were enjoying the offensive game, last weeks first half ushered in more sub prime-related angst and a rapid shift to defensive strategy by turncoat bulls. A harbinger of investors wanting to reclaim the title of risk averse behavior was seen in Mondays tepid inside bar bid. The catalysts that day were by and large bullish. A hard drop in crude back below the typically good for a rally $60-a-barrel and a bevy of well-rounded names involved in M & A deal making [SGP, TRB, DG, and UNH] were offered, but ultimately traders were held back from making any real technical headway.
Aside from possible buying exhaustion, fresh problems within the sub prime group weighed in with investors. Despite recent pleasant-sounding reassurances from the likes of Treasury Secretary Paulson [March 9th] that housing and the mortgage-based securities market were in good shape, somebody forgot to relay that news to both New Century Financial (NEW) and Countrywide (CFC). Monday morning investors woke up to the former having lost its entire credit base from lenders, while the latter went to the confessional and offered investors the words short-term earnings volatility or code for be prepared for the worse.
One week after a Turnaround Tuesday was offered to investors in need of a financial reprieve, Wall Street was greeted with yet another Terrible Tuesday. That day ugliness reared its head for both the sub prime and housing arena, providing sufficient excuse for the profit-taking motive and beyond, depending on where traders looked. On the plus side, Goldman Sachs (GS) blowout earnings report was an early bright spot for the market bulls. Investors also did their best at attempting to shake off disappointing retail sales data [-.1% vs .3% ex auto] by citing weather-related weakness, February being a less significant calendar month and focusing on a stronger March. Unfortunately, thats as good as it got for bulls.
Negative sentiment and collective schnitzeling began to quickly pick up crowd approval after the MBA stated that sub prime mortgage delinquencies were up to 13.3% and their highest in almost five years. Adding to the downside momentum, Accredited Home Lenders (LEND) became the latest sub prime offender when it offered up non-decoder words of liquidity issues. And finally, Massachusetts issued subpoenas to Broker / Dealers (IAI) Bear Stearns (BSC) and UBS (UBS) related to potentially questionable research in the sub prime area. By days end, hard decliners of more than 2% for the S&P500 and Naz put each within spitting distant of their prior lows and some mad money feeling a bit more so.
As one television persona likes to say, Theres always a bull market somewhere, although Wednesdays early follow-through to fresh 2007 lows might have had investors thinking just not here. Setting the stage for investors, selling momentum and a heightened sense of risk aversion ensued as Asian markets like Hong Kong [-2.9%] dropped precipitously in reaction to our own steep declines. Not helping matters, the bellwether Broker / Dealer group was looking much less the champion for any market bulls. Lehman Bros (LEH) issued a comparatively lackluster earnings beat which lent itself to questioning whether a notoriously cyclical group had already seen its best days. Tax preparation firm H & R Block (HRB) announced that its hand got caught in the sub prime cookie jar. One of its subsidiaries forced the company to delay filing its quarterly report and make provisions for increased losses. Also, auto giant General Motors (GM) managed to swing to a profit versus last years quarterly loss, but missed estimates by 71 cents in delivering 32 cents a share. Further, with management citing a weak housing environment and a thriftier consumer as reasons behind the weak results, the message had the bears and negative sentiment motoring on, much to the bulls dismay.
For the bulls still standing, the good news is that the bear raid ran out of fuel by virtue of pushing so hard and so quickly. Fractional breaches of the prior weeks lows, a retest of 20% and nine-month highs in the CBOE Fear Index ($VIX) and an easing of headline pressures, set the stage for a key reversal in the market. For its part, the broad-based S&P500 rallied nearly 2% from risk aversion lows to reinvigorated closing highs. As if to show their renewed spirit for snapping up bargains, Thursday offered out some bearish promise, but the bulls didnt budge away. The less-important and more volatile PPI report disappointed with a core reading of .4% and double Wall Street estimates of .2%. And for investors concerned first and foremost with a weakening economy, an unexpected plunge in the manufacturing-based NY State Empire Index to 1.9 versus expectations of 17 could easily have resulted in headlines of profit-taking. The fact that the combination didnt sway investors was a good sign of an overreaction at Wednesdays lows and validation for the bulls.
The news received on Friday was mostly suited for donning the bull threads. However, chalk it up to weekend worries behavior instead of the weekend warrior type, or Quadruple Witching wiggles and giggles that rarely make sense and ultimately a slight bit of schnitzeling was witnessed. The folks in Michigan dropped their pom-poms to a level of 88.8, two-tenths below estimates calling for 90, but elsewhere March Madness was looking decent. The weeks highlight report on consumer inflation didnt disappoint. The core CPI of .2% was just right with its in-line reading. The Y-O-Y reading of 2.7% remains elevated, but analysts point out the number confirms trend stability and higher back-end data will get peeled off in the months ahead, meaning inflation is working more favorably than not.
The price of oil was also acting as a somewhat silent, but favorable catalyst for investors. By Fridays close, the April contract was off nearly $3 or 5% to finish at 57.11 and well-removed from the always anxious $60-a-barrel benchmark. Also good news for bulls, a release on industrial production was .7% above expectations at 1.0%. The increase was the largest in nearly one-and-one-half years and calls into question the R word being popularized by unsatisfied bears. And finally, after all of the bad news coming out of the housing and sub prime segment, some of prime suspects caught a break. Fremont General (FMT) was granted a $1 billion credit extension, Accredited Home (LEND) was able to find buyers for $2.7 billion of its loans, albeit at a deep discount, and structured financier specialist Moodys (MCO) was upgraded to Buy. All told, it might not deserve the Triple Buy, but Booyah! is looking better than in a long time.
ON TAP THIS WEEK
Sentiment improved by weeks end and the technical picture even more so. The chance for another round of Yen (FXY) and / or carry trade concerns always exists. As does more wobbles in the sub prime area. An increase in either would have the potential to negatively impact equities. However, investors should remember that those catalysts can work to the bulls favor as well. As it stands, the latter commands greater influence entering the week as a slug of housing releases are on tap. Monday gets the ball rolling with the NAHBs survey on market conditions. Then on Tuesday, housing starts and building permits are slated. Both are expected to show a slight bounce from Januarys weak readings. With much of the R or recession-related talk centered on the industrys plight, those figures will be well-watched by the Street as bad news could easily tip the market back towards a defensive stance. Market reaction will be particularly vulnerable in any further saber rattling by the sub prime lenders becomes evident. In the second half of the week, investors will have more housing data to digest as KB Homes (KBH) releases its earnings Thursday morning and Fridays lone economic release is a report on existing homes sales.
The FOMC holds court for two days, concluding with Wednesdays interest rate decision. The benchmark fed funds is widely anticipated to remain fixed at 5.25%. Wall Street will be looking for any subtle changes in the policy statement that might hint at a rate cut. That being said, traders are currently assigning only a 25% chance for any rate relief before August. Elsewhere, a handful of marquee names may persuade investors to react with broad-based enthusiasm or despair. Notables include Morgan Stanley (MS), FedEx (FDX), Nike (NKE) and Oracle (ORCL). And finally, $57-a-barrel oil might finally enjoy the spotlight again by market bulls. Its not-so-quiet move last week was nonetheless largely ignored as a reason to snap up bargains. Of course, in the perverse world of investor psychology, lower crude can also presage investor concerns, real or not, over a weakening global economy.
Economic: NAHB (38), Chicago Reserve MW Business Conditions
Earnings: Movi Gallery (MOVI)
Economic: Housing Starts & Bldg Ps (1.44M, 1.56M)
Earnings: Carrizo (CRZO), Commercial Metals (CMC), FactSet (FDS), Adobe (ADBE), Oracle (ORCL), Chaparral Steel (CHAP), Cintas (CTAS), Darden (DRI)
Economic: Weekly Crude, FOMC Decision (5.25%)
Earnings: Morgan Stanley (MS), Ross (ROST), Citi Trends (CTRN), Sigma Designs (SIGM), AAR Corp (AIR)
Economic: Weekly Claims (320K), Leading Indicators (-.3%)
Earnings: FedEx (FDX), KB Home (KBH), ConAgra (CAG), Actuant (ATU), Barnes & Noble (BKS), Williams Sonoma (WSM), Nike (NKE), Palm (PALM), Jabil (JBL)
Economic: Existing Home Sales (6.35M)
Thanks to the recent exploits of the reawakened risk averse investor, the bullish bias is in its best position in many months. The sentiment extremes reached last week coupled with a bullish key reversal day set up a third rally attempt in the major averages. Entering Mondays session, the intermediate-based follow-through day count is at four and within a time window that could confirm a significant low in the market. The FTD event being watched needs to be defined by a higher volume percentage thrust of 1% to 2% in one or more market indices. Typically, this action is witnessed within seven days of the rally attempt, but has been known to occur past the window, as was the case last summer.
One point not open to debate is if the pivot low is broken. Upon a price breach the count is finished and not reset until a fresh pivot and positive close confirm the potential low. Looking above to the daily chart of the S&P500 (SPY) that low comes in the form of an undercut double bottom forged with a wide range bullish hammer. Based on the strategy, traders begin the process of locating bullish-oriented positions once the confirmation FTD triggers. For followers of Elliott, an early entry which might lead to that intermediate-based technical event is if the EBOT signal [labeled above] were to occur. There are no guarantees of course. But in light of the recent bearish extremes and patterns in place, bullish opportunities do appear close at hand and worth preparing for. While one day doesnt define a trend, after a week in which the bear roamed, the benefit of the doubt is shifting towards working the hedge hog advantage with a bullish conclusion.
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