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Daily State of the Markets To listen to an Audio Version of the report, click on the Play button below:
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Good morning. I’m guessing you’ve probably heard the old saw that says the fastest way to lose money in the stock market is to utter the words “but this time it’s different.” However, I’d like to make a distinction between this famous Wall Street-ism and the title of this morning’s missive. You see, the statement “but this time it’s different” suggests that the investor using the phrase is arguing against something that has proved to be right the vast majority of the time it has occurred. However, with this morning’s title, “Is it different this time?” I’m suggesting that what we saw yesterday may turn out to be a game changer – at least for the short-term.
Since March 9th the trend of the market has been pretty much straight up. The only interruptions in the nearly 40% romp to the upside has been a series of one and two-day wonders, where stocks did pull back but never registered what is referred to as a “lower low.” But yesterday’s big dive may have changed that as the close was lower than the prior reaction low, below both the 50-day and 200-day moving averages, and was accompanied by some technical “oomph.” Thus, many technicians will suggest that the trend, at least in the short-term, is now down.
The big dive was triggered by a handful of stories which suggest that the rally may be running out of gas and that the economic recovery, which may or may not be starting now, is likely to be even weaker than originally thought.
The World Bank kicked things off by lowering their forecast for global growth in both 2009 and 2010. The report suggested the economies of the world will shrink by -2.9% this year, which represents a 70% reduction from the prior forecast for a contraction of -1.7%. The bank also said it expects worldwide growth of just 2% next year, which is down from the previous forecast of 2.3%.
Since concerns about the quality of the recovery have replaced worries of a recovery this month, it wasn’t surprising to see “the reflation trade” take it on the chin again yesterday. In addition to heightened risk aversion (evidenced by a 11+% spike in the VIX), a renewed widening in CDS spreads, and a rally in the dollar, commodities of all shapes, sizes and colors came under pressure again yesterday. The CRB was tagged for a loss of -2.7% and is off almost -19% in the last 8 days.
Next up, a Bloomberg report on insider selling helped support the notion that the recent rally went too far too fast. Citing data from InsiderScope, Bloomberg reported that executives at US companies are unloading their shares at the fastest pace since 2007, which, of course, was right around the time the credit markets started to seize up. While we should remember that insiders are said to sell their shares for any number of reasons and that it is insider buying that really matters, the fact that insiders in the S&P 500 companies were net sellers for 14 straight weeks and that sellers outnumbered buyers by almost 9-to-1 last week was not lost on traders.
So, with the S&P now down -5.6% from its June 12th high, the question of the day is if we are seeing a change in the trend. And while there is little doubt that we’re now seeing a corrective phase, we will also need to determine whether the correction will be of the straight-down variety or more of a sideways affair.
Turning to this morning, we don’t have any economic data to review before the bell but we will get reports from the Richmond Fed and Existing Home Sales at 10:00 am.
Running through the rest of the pre-game indicators, the major overseas markets are mixed with Asia down and Europe up fractionally. Crude futures are moving up with the latest quote showing oil trading higher by $0.68 to $68.18. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.72%, while the yield on the 3-month T-Bill is trading at 0.20%. And finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a modestly higher open.
