July 2008 Market Rewind: Bazooka Intervention

This July, the major U.S. equity indices put in a yo-yo performance reflecting an apparent near-term apex in energy prices and significant federal intervention in support of the Financial complex. The S&P 500, Dow Jones Industrials and NASDAQ 100 cash indices posted mixed results of -0.99%, +0.25% and +0.66%, respectively.

However, these relatively mild month-end results mask the turmoil experienced through the 15th, when the S&P was down some 5% and the VIX (implied options volatility) briefly exceeded 30. Fueling fears early on were reports of a potential General Motors (GM) bankruptcy; rumours of a Fannie Mae (FNM), Freddie Mac (FRE) or Lehman Brothers (LEH) failure, and the seizure of IndyMac Bank. Although the thick of earnings season also added to investor anxieties, aggregate results largely beat expectations. Lastly, inflation measures also came in particularly hot, and Iranian tensions appeared ready to flash at any moment.

In that regard, crude oil peaked at a record high of $147 per barrel, only to rapidly retreat to the low $120s. Equally supportive of an equities recovery, federal agencies made a concerted renewed effort to combat Banking fears with Treasury Secretary Paulson's metaphoric "bazooka," including:

• Availability of unspecified federal lending to the GSEs;
• An overall extension of Fed Window lending through early 2009;
• A naked short-sales ban on nineteen Financial stocks; and,
• Passage of a mortgage default bailout bill estimated at $25-plus billion.

In spite of the equities turmoil, the acquisition market was quite active -- particularly in the Pharma and Biotech spaces. Unlike recent months, Style-Box performance showed relative strength in the Value camp with the nascent recovery of the Financials and Homebuilders. Conversely, the Energy and Materials sectors saw substantive losse

With many pundits calling an intermediate bottom, it will be interesting to see what August's traditional light summer volume brings traders ahead of the Fall political season.

Sentiment:

Highly-Mixed

Volatility:

Moderate (VIX 20-30)

Direction:

Sideways

(click chart to enlarge)

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The Style-Box was calculated using the following PowerShares™ ETFs: Small-Growth (PWT), Small-Value (PWY), Mid-Growth (PWJ), Mid-Value (PWP), Large-Growth (PWB), and Large-Value (PWV). The Sector-Ribbon was calculated using the following Select Sector SPDR™ ETFs: Materials (XLB), Industrials (XLI), Energy (XLE), Staples (XLP), Discretionary (XLY), Financials (XLF), Technology (XLK), and Healthcare (XLV). The Standard & Poors 500, Dow Jones Industrial Average and NASDAQ 100 may be traded through ETF proxies, including the SPY or IVV, DIA and QQQQ, respectively.