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October 7, 2005
End of day save for broad equity indexes?, Fri., Oct. 7, 2005, 7:00 AM
Readers want to know if there was a trend reversal late in the day yesterday?
Bill, What did you think of the "save" for the S&P at the end of the day session? /G"
The extreme selling of the oils this week was overdone. Yes, there was a needed readjusting of share prices to factor in the lower crude oil prices, but the sudden and violent reaction was, in my view, met by massive buying of S&P futures contracts by large capital pool managers who do not see a Black Monday 1987 scenario playing out.
For the S&P, on Wednesday morning the RSI dropped almost to zero, but note what happened on the attempt to rally. There was a massive failure and stocks fell down through the afternoon until the S&P500 RSI was again almost at zero, which was the platform needed for a Thursday morning rally. That too failed, and stocks fell until the mid-session yesterday.
Then in mid-afternoon, with the important S&P 1180 support level holding, there was a rally. It was sharp, broad, and linked to, as I say, massive buying of the S&P futures.
Here is the 30-Minute data chart for the S&P:
Here is the Daily data chart for the S&P, which shows the 1180 technical support level, from early May:
Overnight the selling of stocks continued, but the sell-off was quite muted, except for Japan.
The Japanese Nikkei was down " 1.0 pct, the S. Korea Seoul Composite down " 0.1 pct, Hong Kong up +0.1, Australia flat, and India down " 0.4 pct.
You will note that this selling is much less than the first part of the week. Traders in Asia/Pacific markets are now awaiting today's U.S. Jobs Report, and, more importantly, to see what the large capital pool managers in the U.S. are going to do this morning.
This short-term market trend can go either way. The Jobs Report is basically meaningless since it is post-Katrina/Rita, and will be spun any way the Gnomes want the public to react. The broad market may then react one way or the other, but the first reaction is not necessarily the sustaining one.
I think the odds are probably 70:30 that the broad market will stop the sell-off this morning. But by the end of the day, I do not see a major change.
Traders will use the weekend to make some crucial decisions as to whether they are comfortable pricing capital market risks at this level. If not, the stock and bond market is headed lower.
The key events in the market are still to come " Greenspan and Snow going to China for one and the choice for Fed Head for another " and so, with such uncertainties, I feel there will soon be a second test of the 1180 on the S&P. That too might hold in the next week. But, there is likely to be a further decline in stocks that takes the S&P well below the 1180 level before the bearishness is over.
Through this time, and until the largest capital pools decide to support a program of major capital spending in the U.S., which requires some decisions by U.S. corporate managers to move in that direction rather than continue to outsource, I feel that gold will continue to be strong, and broad equities weak.
Should the broad market make another move to the downside, the weakest sectors will be the ones that held up relatively better than the commodity price sensitive sectors this time around, i.e., in the last couple weeks.
Next ones to avoid will be the financials and regulated utilities that are interest-rate sensitive. My thinking on that is that the Dallas Fed President's comments of an inflation virus" will be taken to heart. Commodity prices are high for a reason, and monetary policy (i.e., higher interest rates) is the only remaining tool in the toolkit the Fed has.
They'd like to use it " if the authorities in China would only help them out at the job site.
Posted by Posted by Bill Cara on October 7, 2005 07:03:08 AM | Category: Cara Today in the Market