Are the Markets Drunk on Hope?

[Excerpted from Bill Cara's Daily Report]

Traders are catching an odorous wind that suggests the widely touted US economic renewal is not happening. On Friday, August’s Durable Goods Orders came in with a decline of -2.4%, while an increase of +0.3% had been expected. August New Home Sales were reported as increasing +0.7%, while a gain of +1.6% was expected. Drunk on hope, the market is starting to sober up.

At the 4pm ET end of the week close in New York, the S&P 500 (1,044.38 -6.40 -0.61%), DJIA (9,665.19 -42.25 -0.44%), and NASDAQ Composite (2,090.92 -16.69 -0.79%) all closed lower for the third consecutive session. Tuesday was the only bright light of the week.

Prices of Crude Oil ($WTIC 66.02 +0.13 +0.20%) and Gold ($GOLD 990.90 -3.00 -0.30%) were quiet compared to all other days this week. $GOLD hit an intra-day low of $985.40.

As we reported on Wednesday, at 2:39pm ET with the S&P 500 (1,079.12 +7.46 +0.70%), DJIA (9,906.73 +76.86 +0.78%), and NASDAQ Composite (2,166.02 +19.72 +0.92%) showing the usual green, the sell-off that began at that moment “was not a page out of the October 19, 1987 Black Monday book, … but it was clearly a shot across the bow.” Thursday morning, following the August Existing Home Sales report, was another shot. Friday, with the negative “surprise” to August’s Durable Goods Orders and New Home Sales data, there was a third warning shot in the market. One of these days…

As clearly stated on Thursday, “the issue now is, with Bernanke and Geithner talking economic recovery, does the economic data support them, or has it all just been about hope.”

The Toronto Exchange Composite (11,212.39 -73.37 -0.65%) sold off for the 4th day in five this week, and 6th in the past seven, obviously reacting to the sell-off in Crude Oil from $73 and Gold from $1,017 over that time. The Venture market (1,259.64 +3.28 +0.26%), however, made a small gain on Friday, heading into the Toronto Resource Investment Conference this weekend.

In NY, Friday, leading on the downside were the Industrials, Basic Materials and Financials sectors (XLI -1.4%, XLB -1.0% XLF -1.0%), while the strongest, Healthcare (XLV –0.1%) was a slim winner.

There were no major industry groups that were stronger on the day, and only the ones that were part of computer algorithm hedge trading, were winners, such as Airlines and Pulp & Paper ($XAL +2.4% $DJUSPP +1.6%). The weakest, Retailers and Gold ($RLX -1.5% $XAU -1.5%), were at least reacting to economic drivers.

For the Cara 100 company stocks on Friday, there were only two notables, both the result of computer algorithm based hedging programs. Research in Motion (RIMM -17.0% on +595% Avg Daily Selling Volume) and Brunswick Corp (BC +15.8% on +296% ADSV) were shockingly extreme. This is not investing. The second biggest moves of the Cara 100 company stocks were Silver Wheaton (SLV -3.1%) on the downside and Starbucks (SBUX +3.4%) on the upside. Volume on Friday was not extreme as SBUX was 3rd biggest change from ADSV and it was up just +62% from average, and SLV didn’t even make the top 25 list. So, what is happening here is that Humungous Bank & Broker ((HB&B)) traders are sucking people in and then hammering them with a single trade. This is the reason Goldman Sachs is making profits of over $100 million every day, and the Bull phase is viewed as the “ugliest” on record from the perspective of both the public and the independent pro traders.

The US Dollar dipped a bit ($USD 76.78 -0.13 -0.17%), but without the help of political comrades in the UK (Pound $XBP 159.53 -1.04 -0.65%) and Canada (Loonie $CDW 91.62 -0.19 -0.21%) the $USD would have sunk even more as the Yen ($XJY 111.56 +2.04 +1.86%) and Euro ($XEU 146.92 +0.37 +0.25%) were extremely strong, particularly the Yen.

The same thing happened the previous day when the $USD soared with the help of a crashing Pound and Loonie. How convenient for negotiators at the G-20.

Speaking of the G-20, which is now the de facto economic and financial systems controller, people are asking why the G-20 instead of the G-7. The difference is purely politics. When the US wants to get its way in the G-7, it needs only to pull in one other country plus the usual comrades in Canada and the UK, whish is usually Japan. But Japanese voters just turfed the long-standing political power in the country (only twice out of power since WWII), and the new government has taken a very hard line to the US. So now it’s a case of three votes against 17, and things will now change.

The final jab by the US was a shot Friday to boom the Yen, which will put more pressure on their exporters, and of course jobs. But many traders now see, for both fundamental and technical reasons, that the $USD will strengthen here, and the Yen weaken over the balance of the year. Besides the rush into the Yen on Friday had much to do with the equity market sell-off after a major bank announced a much needed share offering to bolster capital reserves.

US Treasury Bonds ($USB 120.88 +0.91 +0.76%) lifted for the third day in a row and 4th in five as there was a flight out of the higher risk equities, and because the US economic data is looking less than hopeful. Treasury yields on the 30-year (4.093 -0.81 -1.94%) and 10-year (3.329 -0.52 -1.54%) had a serious decline, while the 5-year paper (2.372 -0.05 -0.21%) continues to try to hold its ground. T-bill yields remained steady at almost zero (0.090 0.00 0.00%).

Earlier Friday in overseas equity markets, except for Australia (4,714.8 +0.14%), the action was bearish. Shanghai (2,838.8 -0.52%), Hong Kong (21,024.4 -0.13%) and India (16,693.0 -0.53%) were down, but the Nikkei 225 of Japan (10,266.0 -2.64%) was smashed after a major bank announced a large capital infusion is required.

France (3,739.1 -0.51%), Germany (5,581.4 -0.42%) and the FTSE 100 of London (5,082.2 -0.06%) weakened into the close as traders there saw a disappointing US New Home Sales report at 10:00am ET.

At the close in futures trading, the Euro (1.4664 +0.0011 +0.07%), the DJIA December futures (9619 -16 -0.17%), and the Crude Oil futures (66.02 +0.20 +0.30%) had softened during the day following the disappointing economic data.

The precious metals market were also softer as the day wore on. Compared to prices at 7:00am ET Friday, the spot (cash) trades were as follows: for gold (991.20 -4.88 -0.49% vs 996.47 +0.39 +0.04% at 6:59am ET), silver (16.00 -0.19 -1.18% vs 16.25 +0.0613 +0.38% 06:59am ET), palladium (289 -1 -0.34% vs 291 +1 +0.34% 05:37am ET), and platinum (1272 -20 -1.55% vs 1293 +1 +0.08% 05:37am ET).

Forget the final communiqué; the market will tell us the outcome of the G-20 meetings. There may be head fakes, but ultimately the market speaks the truth.

Comments

[Senan:]

It's a h(y)ope at the moment. There's an endless supply of data and reports, both positive and negative. Which way it affects the market on any particular day is anyones guess.

Sep 27 06:55 PM

[williemo:]

looks like time to short BC. up 250% in 8 weeks. Outdoor sports equipmnent company......up only after first good sales month in 3 yrs.
wow. now that's speculation !!!

Oct 01 11:56 AM