The equity markets finished mixed on Tuesday, as lower than expected numbers on housing starts tempered enthusiasm about a housing market recovery. The S&P500 and the Dow30 finished slightly negative, while the Nasdaq and the small cap Russell2000 finished slightly positive.
The SPX spent much of the day bouncing between the levels of 910 and 916, before selling off in the last half hour and close at 908. There was a lack of conviction from both the bulls and the bears and it showed yesterday.
Finance and Real Estate Lags
The financial sector lost some of Monday’s gains as the Senate passed legislation to control Credit Card charges and interest rates. This is likely to reduce the profitability of banks issuing credit cards. There is continuing uncertainty about the fate of commercial real estate, with Moody’s saying that commercial property values have plunged and the WSJ reporting that smaller regional banks may incur losses up to $100B as a result of their lending to finance construction and other CRE related activity.
I personally feel that the fall in new construction permits is necessary for the system to flush out existing inventory. This is likely to put a downward pressure on the job situation. However the bigger challenge facing our financial system is the decline in asset prices and reducing supply of new homes is perhaps the single most effective method of maintaining price stability.
Capital Raising and Market Indecision
As I have alluded to, there has been a concerted effort to provide support to the market as banks and REITs have tapped the private markets to raise new equity capital. Bank of America (NYSE:BAC), which has to raise the largest amount of new capital as the result of the Stress Tests, issued 825 million shares at $10/share to raise $8.25B in new capital.
The support provided to enable these capital raises distorts the markets and reduces the conviction of participants. The bulls are not sure whether the higher prices will last once the secondary offerings are done; the bears are worried of being squeezed as big money provides support.
I am still unable to find convincing buy or sell setups in this market, and am simply day-trading.
The oil services sector continues to do well and the OIH is up almost 5% in the past two days. It has not pulled back enough for me to open a position.
The refiners continue to do well, with TSO breaching last Thursday’s highs yesterday. There is expectation that today’s Oil report is going to be bullish for refiners and it is being reflected across the oil sector. I continue to hold my TSO calls, though I may take some profits if we get a spike today.
IYR: Choppy Action but Signs of Topping
IYR continues to have wild intra-day swings. In spite of all the negative reports about CRE, IYR managed to take out Monday’s highs before closing in the red by 1.59%. It failed to cross the lower trend line of the channel I have referred to in my previous posts. The choppy action Tuesday also suggests that the current up-swing is possibly done, and the downtrend is likely to resume.
Hewlett Packard’s (NYSE:HPQ) financial results were not received well by the market and the stock was down more than $2 after hours. This is likely to put the technology sector under some pressure today. Though the market has welcomed the capital raises by banks so far, investors may also start questioning the amount of dilution equity holders are being forced to undergo.
Though I have been more wrong than right on this, I expect a day with a bearish bias today. This does not necessarily mean a big sell-off. Tuesday the market had a bullish bias most of the day, threatening to take out the 915 level on the SPX and rip higher. However, we ended the day almost flat. Wednesday may also be a day similar to yesterday where we churn with a bearish bias but end the day mixed.