Volatility should continue in trading tomorrow due in part to news related to sub-prime and credit markets. News from Capital One after the bell may impact negatively on stocks as well.
Bond yields are falling as investors move into bonds, pushing bond prices higher. This is a flight to quality move with the three month Treasury Bill yield falling 80 basis points in trading today. Some of the move into bonds may also be explained by a view taken by many traders that the FOMC will lower the federal funds target rate to help ease some of the issues facing credit markets.
The current credit market crisis is still very much at the forefront for traders and while we are experiencing a bounce in all indices, there are a number of potential catalysts for stock prices which introduce the potential for higher whipsaw risks.
The July Housing Starts report expected is an indication of health in the housing market and may be a catalyst for stocks.
Credit market fallout is also a focus for traders and could be a catalyst for stocks.
Tuesdays Action:
As we discussed yesterday, todays selling pressure came in advance of the August 15 deadline for quarterly redemptions at many hedge funds. Many traders are cutting risk and repositioning themselves for the potential for significant selling pressure in stocks.
Sentinel Management Group announced that it would halt processing redemption requests from clients and stopped accepting new money. This extends from the liquidity problem in the high yield and junk bond segment of the credit markets.
Many traders will be watching to see if other companies follow suit as this quarters hedge fund redemption expiry date arrives tomorrow. In other big news, Wal-Mart announced weaker than expected quarterly earnings from Wal-Mart. Wal-Mart is the world's largest retailer and represents a large segment of consumer spending trends. The company today cut its profit outlook for the year due to slower consumer spending trends. Second quarter earnings were lower than analyst expectations after one time items were taken out of the numbers.
The S&P500 bolted away early today but eventually sold off towards the close once again. What we are seeing is that many traders are reducing their risk exposure in this highly volatile market. Traders continue to face the prospect of a stock market that is now facing a liquidity crisis coupled with weak housing trends and slowing domestic growth. Interestingly we have an August 15 deadline for September 1 redemptions for many hedge funds which is a red flag for our near term trading.
If Hedge funds need to sell credit market instruments, it could see a significant sell pressure in stocks.
We are near the lower end of an eleven day trading range. We are still seeing continued selling pressure in financials today warning that traders remain cautious about the impact of credit market woes. A lower breakout of our trading range warns of the potential for increased selling pressure in stocks.
Overnight Action:
Asian Stocks fall pulled lower by financials;
The US Futures were punished early with news from BNP Paribas, a French bank, reporting that it would temporarily suspend redemptions from three of its funds citing concern finding and pricing a market for some its
The European Central Bank injected capital by increasing financing available to banks, allocating 94 billion euros to 49 banks overnight to help provide liquidity to money markets. The U.S. Federal Reserve did the same thing, adding $12 billion
Record volumes in stocks on sharply lower prices carry a warning that many traders are adjusting risk profiles on the view that there may be further disclosure and impact from current credit markets woes.
A key watch will be on whether credit market liquidity and pricing issues will spread to commercial paper, which could limit access to short term financing for less secure companies. Traders will also be watching to see if foreigners begin to sell the U.S. dollar and U.S. dollar denominated assets.
If we continue to see selling pressure in the S&P500 Index tomorrow, a potential near term target is at 1417. Traders will be watching news and data to help define risks and underlying enthusiasm behind price trend development.
The S&P500 Index rallied strongly during the day; however, a rumor that Goldman Sachs was going to release a negative news item resulted in selling pressure that wiped 30 points from the market. The S&P500 Index quickly recovered in the last half hour of trading once the rumor was put to rest, closing up 20.78 at 1497.49.
In looking at the move higher in the S&P500 Index today, the index is at the upper end of an eight day trading range. Volatility has been high. Whipsaws risk is high. Potential catalysts are numerous due in part to the size of the credit market impacted by recent liquidity and pricing issues. News items continue to carry the potential to sharply move the market.
The current high volatility in equity markets is due in part to the seriousness of issues facing the mortgage and credit markets.
American Home Mortgage, the 10th largest home lender last year, filed for bankruptcy. The company issues almost $60 billion in home loans last year.
Fanny Mae and Freddie Mac have requested a reprieve from regulators to raise the maximum amount of home mortgages and related securities they can hold as an attempt to provide liquidity to the mortgage market.
Despite the current issues affecting the market, Traders rallied the market today as the larger outcome for the economy remains obscure. We must remember that the events that impact of the credit market liquidity and pricing issues will have a significant impact on stocks. We could easily see today's gains erased If news supported a view that credit market woes will broaden and significantly impact the economy. Alternately, any positive news could see a continued gain in the market.
The Employment report was mixed with net job growth of 92,000 in July and a tick up in the unemployment rate to 4.6%. A soft report in labor markets may not be a bad thing in regards to a measure on inflation, but in regards to support for consumer spending when there is a possible credit crunch centered on housing, weak labor market growth could be viewed as negative.
Stocks began to see increased selling pressure early in trading after Standard and Poor's lowered its rating on Bear Stearns to negative from stable due to exposure to the distressed mortgage market and corporate buyout market. This contributed to selling pressure in Financials on credit concerns.
Due to the fact that credit risk exposure is hard to measure and because credit markets are so large, traders should remain cautious in near weeks. Major U.S. indices are at or below weekly trading range levels. If we see follow through selling pressure on Monday, it warns of the potential for significant sell pressure in stocks.
A lack of liquidity, re-pricing and de-leveraging in the sub-prime mortgage and high yield bond markets is a key concern for stock traders in near quarters. It is likely that the fallout from a credit crunch in U.S. financial markets is not yet over, supporting caution for traders.
For trading tomorrow the three day trading range on major U.S. indices is on watch. Breaking lower out of the range warns of the potential for significant sell pressure in stocks. A move lower now would support a target on the S&P500 Index of between 1390 to 1400.
If we remain within the trading range it continues to suggest some indecision in financial markets. If we saw a move higher tomorrow, traders should remain cautious as whipsaw risks are high and the de-leveraging process due to a credit crunch could still do significant damage to the financial sector and to housing markets, which could lead to significant sell pressure in stock markets.
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