Global Markets Overview: Beware Illiquid, Pre-Holiday Trading

by: Cliff Wachtel

Stocks: Prior Day: Asia, Europe, US up, Today: Asia, Europe up. Pre-Holiday thin liquidity is dangerous –don’t be scammed –stand aside and enjoy the holiday.

  • FX: bias against safety currencies [JPY, USD, CHF in order of safety appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD retreats against everything as poor housing data serves as profit taking excuse despite the prior day’s even more positive housing data
  • Main events: Mon: JPY: BoJ Monthly Report, Trade Balance+ CAD: Core Retail Sales m/m, NZD: Current Account, AUD: CB Leading Index, Tues: GBP Current Account, USD: Existing Home Sales, NZD: GDP q/q, WED: GBP: MPC meeting minutes, CAD: GDP m/m, USD: New Home Sales
  • Big Theme: Profit Taking on USD Rally Spurs Bounce In All Anti Dollar Positions on Pre-Holiday Thin liquidity: DON’T BE SCAMMED BY ILLIQUID MARKETS – SEE RECOMMENDATIONS BELOW FOR THE COMING DAYS


US: Disappointing new home sales, personal spending, and UoM Consumer sentiment numbers caused stocks to surrender opening, follow-up from Europe gains, however, the rebound was resisted at session highs and left gains to chop their way into the close.

The major indices started the session in higher ground amid continued broad-based buying that was helped along by solid gains throughout Europe and Asia. A pullback by the greenback also provided support; it concluded the session with a 0.5% loss against competing currencies after it had hit a three-month high in the previous session.

Initial gains came despite a smaller-than-expected increase in both personal income and spending in November. They were up 0.4% and 0.5%, respectively. Meanwhile, core personal consumption expenditures for November were flat. They had been expected to rise a modest 0.1%.

Stocks weren’t able to shrug off the November new home sales numbers, however. New home sales for the month fell 11.3% from October to an annualized rate of 355,000 units, which is well below the rate of 438,000 units that had been widely expected.

The news caused the broader market to slide in a hurry. Shares of homebuilders had been up nearly 2% ahead of the report, but saw that gain nearly vanish entirely. They were able to reclaim some of the gains and finish 0.7% for the better.

Materials stocks and energy stocks helped lead a broader market recovery, but they were unable to push the broader market past the session high that was set in the early going. That high, which marked a new 52-week high for the S&P 500, created a line of resistance in afternoon action. Still, the two sectors logged gains of 1.5% and 0.5%, respectively.

Support for the sectors came amid higher commodity prices and energy prices. While a retreat by the dollar helped both groups, oil got an added benefit from a larger-than-expected weekly inventory draw of 4.84 million barrels. Oil prices settled 2.9% higher at $76.59 per barrel.

With only a few days left in the holiday shopping season, Internet retailers were also in favor. They teamed with large-cap tech to drive the Nasdaq Composite to another new 52-week intraday high and closing high.

Financials fell out of favor this session. The sector settled with a 0.4% loss as diversified banks stocks (-1.5%) and diversified financial services plays (-1.0%), like Citigroup (NYSE:C) (3.29, -0.05), faltered.

Citigroup saw some of the most trading volume this session, but that’s not saying much given the lack of overall participation. Fewer than 800 million shares exchanged hands on the NYSE this session. The 50-day average stands just above 1.2 billion shares. The lack of participation should not come as a surprise ahead of the Christmas holiday, but market watchers should note that lack of trading volume is often tantamount to a lack of conviction among the investing community, so swings by stocks on light volume shouldn’t necessarily be considered telling signs of market direction.

  • DJ30 +1.51
  • NASDAQ +16.97
  • NQ100 +0.7% R2K +1.2%
  • SP400 +0.7% SP500 +2.57
  • NASDAQ Adv/Vol/Dec 1835/1.59 bln/855
  • NYSE Adv/Vol/Dec 2161/786 mln/847

Asia: Asian stocks gained on Thursday, with Tokyo shares hitting their highest in three months, while the dollar edged away from recent peaks on weak U.S. housing data.

Europe: Europe’s leading share index, the FTSEurofirst 300, rose for a fourth straight session on Thursday and remained on track to post its best yearly gains in a decade, but volumes were low as several markets including Germany and Italy were closed.

ASIA- DOWN N225I +1.91% HS +1.12% SSEC +0.76% FTSTI +0.63% AORD +1.39 %
EUROPE UP FTSE +0.82% DAX +0.20% CAC +0.32%%
US- UP S&P +0.23% DJIA +0.01 NASDAQ +0.75%
THIS MORNING UP N225I +1.53% HS -0.88% SSEC +2.59% FTSTI -0.14% AORD +0.99 %
UP FTSE -0.06% DAX +0.20% CAC +0.03%

Commodities: Dollar index closed Monday with a 0.4% gain, the fifth straight advance for the Dollar Index. The move undercut commodities considerably, sending the CRB Commodity Index from a 0.6% gain to a 0.5% loss,


SINGAPORE (NYSE:AP) — Oil prices extended gains above $77 a barrel Thursday in Asia as a larger than expected drop in U.S. crude supplies fueled investor optimism that consumer demand is improving. A falling USD on low-liquidity pre-holiday profit taking also supported oil and other commodities, as well as the fact that they have reached oversold levels and were due for a bounce on any USD weakness, which was the prime short term driver behind their decline.

The contract rose $2.27 to settle at $76.67 on Wednesday after the Energy Department’s Energy Information Administration said U.S. crude inventories fell 4.9 million barrels. Analysts had expected a drop of 2.0 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Crude has jumped from $69 a barrel last week on investor expectations that global crude demand, especially from Asia, will rebound next year and help boost prices. Oil prices have more than doubled from a year ago, and most analysts are forecasting crude will average between $75 and $85 in 2010.

Gold: Gold prices inched up closer to $1,100 per ounce on Thursday as a recent drop to seven-week lows spurred some bargain hunting in a holiday-thinned market. As with oil, gold’s sharp selloff on the USD rally left it ripe for a bounce on any USD weakness.

Traders said the market was in a downtrend in the near-term, but that buying from Asian investors in the dip could lift prices above $1,100 before London opens for a half-day later.

Prices could then be capped as London players often use a rise in Asian trading hours to take profits, market players said. The lower trend line of its descending channel held as support, though it violated another up-trend line from August (see chart below or in full version). $1085.86, its 76.4% Fibonacci retracement is its next likely support level.

Currently holding just above 1103 key support, where there is a convergence of 38.2% Fibonacci retracement and ascending up trend line, as well as minor price support tested 5 times over the past 2 months.

CURRENCIES: Current bias against safe havens (JPY, USD,CHF), as stocks rise. USD lower against all. Illiquid trade unlikely to have much meaning, though it may be volatile, especially if there are any surprises. In sum, low liquidity and risk of further “sovereign debt threat” remain the biggest potential market movers. (Click to enlarge)

02 DEC 24 (Reuters)

USD: Wednesday, the USD index dropped vs. all majors 0.4%, as disappointing New Home Sales data, which has a negative impact on jobs, consumer spending, and thus expectations for stimulus removal and interest rates, caused the dollar to sell off against everything.

Of course, given the dollar’s steep run higher, markets were ripe for any excuse to take profits, and this was indeed more of an excuse to sell the USD than any real change in its prospects. Remember that on Tuesday, existing home sales were 6.54M vs. 6.29 expected and 6.09 prior.

In other words, 250K more homes were sold than forecasted and 450K more than the prior month. Whereas the miss in new home sales of 355k vs. 442K forecasted was only 13K and only 45K less than last month. Do new home sales really generate 10x-20x more jobs and spending than existing home sales? At worst, these two figures more or less balance out, though we suspect that the combined picture is still more positive.

In sum, we suspect the USD drop was a classic case of low liquidity overreaction from the remaining traders seeking an excuse to take profits ahead of the holiday. With the USD up around 5% since its move began, typical retail traders using 200:1 margins had potential profits of up to 1000% – a 10x gain.

CONCLUSIONS: S&P 500 remains in a tight range continuing its consolidation around 1100. It’s been in a horizontal trading range of 1090-1112 since early November. Later liquidity and low rates support stocks and other risk assets as cash seeks a parking spot, but questions on valuations and still poor fundamentals weigh against stocks, and have many believing the rally is in trouble and that a bearish double or triple top is forming.

Dubai again reminds markets of real risk of sovereign debt default from Greece, Spain, and now Austrian banks. However, recent good jobs and spending figures in the US, along with continued China growth, suggests valuations may not be so overdone, upping the chance that the S&P may be able to avoid a major pullback for now. Traders should consider going with the current trend but be ready for pullbacks.

TRADE RECOMMENDATIONS: Profit Taking on USD Rally Spurs Bounce In All Anti Dollar Positions on Pre-Holiday Thin liquidity trade. Because we suspect that the Euro-zone’s debt travails are far from over, and that some key commodities are still overpriced, our bias is to believe the USD trend up still has room to run, (though much will depend on whether US economic data continues to support a belief in improving jobs and spending. It’s unclear if that will happen, though current data suggest more upside than downside potential for US jobs and spending, though the path upwards may well be neither straight nor steady).

Overall, there are enough potential EUR debt troubles to support the USD both as a safe haven and anti-EUR play for the months ahead, which suggests trouble for commodities too. Thus we view the current USD retreat on low liquidity as a developing setup for entering new long USD or short USD crosses at support levels.

IN SUM: DON’T BE SCAMMED BY ILLIQUID MARKETS: Given the dangerously low liquidity levels prevailing until next week, traders should be cautious, using small positions and tight stops if trading at all, and should stick with the prevailing pro USD trend by WAITING FOR THE REVERSAL of the current USD pullback and rise in its crosses and commodities, and enter near a strong support levels as shown in prior day’s charts, to catch the continuation of the current pro USD trend vs. other higher risk currencies and commodities.

Author's Disclosure: No Positions

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