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Market Wrap

Two Decisions

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One decision impacting our equity markets was made during the wee hours of the morning this morning. The Bank of Japan kept its key lending rate steady at the conclusion of its two-day meeting last night. As a result, the yen weakened against the dollar and the euro, with its daily and weekly losses amounting to the biggest losses seen in years. The converse of that is that the dollar strengthened against the yen, a result that has been positive to equities for the last couple of years. Reports from across the globe noted an appetite for riskier high-yield investments as the yen carry trade rebounded.

Equity futures had already rebounded. If equities had been pressured by the unwinding of the yen carry trade, they also had been hammered by the credit crunch. Bank of America's decision to invest $2 billion in preferred Countrywide Financial (CFC) shares had come even earlier than the Bank of Japan's, sending our equity futures higher.


Although investors welcomed the bounce in U.S. futures this morning, some concerns remained. While the Bank of Japan revised its original intention to raise its key lending rate at this month's meeting, that country's central bank did not revise its overall plan. One voting member dissented, wanting to raise rates last night, and Governor Fukui's post-meeting comments were decidedly more hawkish than many had anticipated. The strengthening of the dollar against the yen might not outlast any rate hike in Japan, particularly if conditions here stayed the hands of our FOMC members and kept them from raising rates or even forced them to lower rates.

In addition, some in the financial world speculated that the recent volatility in currency moves and the resultant bloodbath by those in yen carry trades would not soon be forgotten. The conditions that had made those yen carry trades so favorable might not exist as they did previously.

Although Governor Fukui asserted that the Bank of Japan would not be influenced by the policy of other central banks, that statement may have been a bit disingenuous. Many economists theorize that the BOJ's ability to raise rates or not might be somewhat dependent on whether the European Central Bank goes ahead with its intention to raise rates and, to some degree, whether the FOMC does, too. If the ECB raises rates, that would likely strengthen the euro against the yen, allowing the BOJ some leeway to raise rates, too, without too adversely affecting the euro/yen values and, therefore, the yen carry trade.


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Another concern loomed this morning. The recent infusions of cash that the Fed has pumped into our system via its temporary open market operations through the Federal Reserve Bank of New York resulted in $14 billion in repos maturing today. Any infusion less than $14 billion would be a net draw on liquidity and no one wanted to see a net draw. Before the open, the Fed had announced a $7 billion 14-day repo, accepting about $6 billion in mortgages as collateral for the loans, leaving a $7 billion net draw to be addressed. By a few minutes after the open, as equities were already slipping off their early highs, the Fed had added $10.25 billion more, for a total add of $3.25 billion.

Liquidity issues surfaced again early in the day. The sale of Home Depot's (HD) wholesale supply unit could be threatened, news sources reported. That sale was due to be completed today, but some speculated this morning that investment banks were hesitant to fund, even at a lower price than originally considered. As this report is prepared, market watchers still await news as to whether the sale went through. The title of the last article I noted, published about 30 minutes after the close, was "Home Depot has no comment on supply-unit deal." Similarly, Ford (F) admitted yesterday that, while the global credit crunch was not slowing down the sale of its Jaguar and Land Rover brands, the crunch was an issue.

Those concerns did not appear to weigh heavily in the pre-market session as the yen carry trade rebounded, sending the globe's equities higher. The Bank of America Corp's (BAC) decision to invest $2 billion in CFC's preferred stock prompted comments along the lines of "the worst may be over." That stock can be converted to common stock at $18 per share. As quoted in a Reuter's article, BAC's chief executive summed up the conditions by saying that he hopes the company's "investment will be a step toward a return to more normal liquidity in the mortgage markets." Others were not so sure of either BAC's intentions or the effectiveness of this action in returning the mortgage markets to a more normal liquidity.

Was that true? Were we returning to a more normal liquidity? Would the overnight euphoria continue through the day? As the open neared, the USD/yen pair had approached a significant resistance band just over 117.00 and begun pulling back. At the open, the pullback still maintained the rising uptrend line that had begun forming last Thursday, but would the currency pair hold that line all day?


The pair didn't hold that intraday line, but it did cling to the 38.2 percent retracement of its steep decline over recent weeks.

Annotated Daily Chart of the USD/yen:

What happens on this chart may trump almost all other market developments, so I urge our subscribers to keep up with what's happening with this currency pair. A particularly alarming development after today's daily candle would be a gap down below today's low and a decline from there. If you don't have access to charts that include this currency pair, you can watch the raw numbers on CNBC's crawler, usually in the upper left-hand corner of the screen, with the number listed as "yen." The levels listed there will appear counterintuitive to some: a rise in the "yen" level on that crawler will be supportive of equities; a decline will pressure them. The "yen" label on CNBC actually represents the value of the dollar against the yen. When it's climbing, the dollar is strengthening against the yen, or, alternatively, the yen is weakening against the dollar. In either case, the candles seen on the chart above would be climbing.

Although it's not apparent on that daily chart, 15-minute intraday charts of this currency pair show a potential head-and-shoulders formation with a neckline at about 115.60-115.67, so that would be a level of support that equity bulls would like to see hold. The euro/yen pair's daily chart is a little stronger, with the ECB's stated intention to raise rates soon pushing the euro/yen combo above a 38.2 percent retracement of its decline. Still, the euro/yen intraday chart reveals a similar head-and-shoulders formation.

The SPX's daily candle was indicative of indecision. Coming at the top of a rise, such candles can be reversal signals, but it's dangerous to assume a reversal before it happens. For now, it signals some need for caution.

Annotated Daily Chart of the SPX:

With the 200-sma providing support today and the 10- and 20-sma's flattening and rounding up slightly underneath the SPX values, an obvious effort to strengthen support can be seen. It appears from this vantage point that it would take a strong push downward to break that support. Adverse news about the credit crunch or the crunch's effect on a major institution or an adverse weakening of the dollar against the yen could provide just such a push, so be on the watch.

Annotated Daily Chart of the Dow:

I want to note that the TRAN and SPX did not drop into support comparable to Dow 12,050-12,080 today, but rather last week.

As was noted with the SPX, a doji at the top of a climb can be a reversal signal but should not be assumed to be a reversal signal until prices confirm a reversal.

Annotated Daily Chart of the Nasdaq:

If yesterday's and today's candles were combined, the resultant candle would be a doji with a long upper shadow, but today's candle was edged firmly between support and resistance, with more support and resistance gathering nearby. With RSI at a neutral 52.61 at the close (not shown) and with the candle ringed by support and resistance, it's difficult to draw any strong conclusions about next direction. It should be noted that the decline today came after the Nasdaq attempted to push above a descending trendline off the 7/19 high and failed to do so. I didn't show the descending trendline because it's easy to eyeball and the chart is cluttered enough.

All in all, I'd have to give the day's result a more bearish than bullish cast but not as strongly bearish as it would have been if the daily candle's body had engulfed all of yesterday's range.

Annotated Daily Chart of the SOX:

Intraday charts for the RUT reveal a potential head-and-shoulders formation. These formations do not prove trustworthy lately, but another potentially bearish pattern revealed itself on the daily chart, a bearish engulfing candle.

Annotated Daily Chart of the RUT:

Annotated Daily Chart of the TNX:

Today's Developments

This week's economic calendar has been light. Today was no exception. Initial and continuing jobless claims led off the releases at 8:30. Initial claims decreased by 2,000 to 322,000. This result met expectations. The four-week moving average, still influenced by the last few weeks of climbing claims, rose 4,750 to 317,750. Continuing claims rose 16,000 to 2.57 million, the highest level in more than 4 months. The four-week moving average of continuing claims dropped, however. The insured unemployment rate remained at 1.9 percent. I can't remember when it was last anything but 1.9 percent.

July's Mass Layoffs followed at 10:00. The U.S. Department of Labor collects these statistics from companies with at least 50 former employees filing unemployment insurance claims against them over the previous five-week period. The latest numbers show 1,221 mass layoff events in July, up 2 from the previous number of events. The total number of claimants in those mass layoffs was 124,835, down 3,062 from the previous report.

The Congressional Budget Office updated its annual budget projections, releasing those figures in the middle of the morning. The projected shortfall narrowed to $158 billion for the fiscal year that ends September 30. This amount was lower than last year's $248 billion deficit and also lower than the CBO's March forecast of $177 billion. The CBO warned, however, that rising healthcare costs could present challenges it termed "daunting" in the long term. Despite the risks from that challenge and others such as those presented by the housing and financial markets, the economy "will remain sound" with growth at 2.1 percent for the current calendar year and 2.9 percent for next year, the CBO said.

The Energy Department reported on Weekly Natural Gas Storage for the week of August 17 at 10:30. Industry watchers projected a build of 30-35 billion cubic feet. The build was slightly less at 23 bcf's. Natural gas, gasoline and crude all closer higher today, with crude at $69.83 as this report is prepared.

These economic releases and events seemed just an addendum to the real action today, as traders focused again on what was happening in the credit markets and what our Fed and other central banks had done and might do. The Fed's infusion of cash was noted, especially as the Fed accepted mortgages as collateral for at least some of the loans it offered today through its temporary open market operations. The Federal Reserve also released information noting that outstanding commercial paper fell for the second week in a row, dropping $90.2 billion after plunging $91.1 billion the previous week. Commercial paper, a Marketwatch.com article explained, comprises short-term promissory notes that corporations issue. Commercial paper that was backed by assets declined $77.1 billion after previously dropping 48.4 billion. Foreign financial institutions saw their commercial paper falling $16.2 billion, making up a hefty portion of the total $17 billion drop for this week in the financial sector.

A study of THE LONDON TIMES indicates the depth of concern about liquidity issues and exposure to troubled asset-backed commercial paper across the globe. Barclays was the first bank in England to cry uncle and go to the Bank of England's lending facility for an emergency loan, but Barclays blamed HSBC for an error that had forced the action rather than anything related to liquidity problems. No bank wants to go to the Bank of England any more than U.S. banks want to go to the Federal Reserve for help, although as Keene Little and Jeff Bailey both reported in the Market Monitor, the live portion of the site, some U.S. banks have begun going the Fed's discount window for just that purpose. In England, other troubles surfaced. HBOS bailed out one of its own funds. Rumors about other institutions swirled, including about the level of exposure to the asset-backed commercial paper market. Earlier in the week, rumors circulated about German banks. This is not just about a problem in the U.S. housing market any longer.

After hours, the Fed released its discount borrowing snapshot for the week of 8/22/07. Few banks have taken up the Fed's offer at the discount window, as noted in the previous paragraph. Some industry watchers speculated that some banks might be waiting until after the close of the quarter August 31 so they don't have to note such an action on their books for the quarter.

For those unfamiliar with the Fed's discount window operations, it might be helpful to see how the Fed itself defines those operations. On the Federal Reserve Bank of New York's website (www.newyorkfed.org), with that bank being the entity through which our central bank conducts many of its operations, the bank defines the discount window, although I'm not sure there's much clarity in its definition. That window, once an actual window but no longer so, of course, is "a safety valve" that "can help alleviate liquidity strains in a depository institution and in the banking system as a whole." By "supplying liquidity during times of systemic stress," the window "helps ensure the basic stability of the payment system."

Banks have been reluctant to apply for that help, as noted. As of 8/22, the only outstanding loans were the $2 billion in loans requested from four major banks. Those banks are Citigroup (C), JP Morgan (JPM), Bank of America (BAC) and Wachovia (WB), each of which borrowed $500 million. Deutsche Bank said that it had also asked for an amount it did not reveal on Friday. Although the borrowing for the week measured more than it had for more than a year, the $2.0 billion totaled far less than the record September 12, 2001 amount of $45 billion. Since then, the Fed changed the structure of the discount window.

One ray of hope did stream from overseas skies this afternoon. BNP Paribas, whose August 9 announcement that stopping withdrawals from three of its funds contributed to market declines across the globe, said today that it would resume trading those three funds next week. For a while this morning, the news that BAC had taken a stake in CFC boosted confidence, too, although ultimately neither development was to provide much help for the indices in general or for CFC, which ended the day only a few cents above yesterday's close.

BAC said that market participants were underestimating the value remaining in CFC, and that was welcome news. Many applauded BAC's move, noting the many benefits to BAC, including dividends, a favorable tax treatment for those dividends because BAC will own less than a 20 percent stake in CFC, and some downside protection because of the difference in CFC's Wednesday closing price and the price at which those shares are converted to common stock. Some speculated that this was a step toward BAC taking an even bigger stake in CFC. CFC's CEO denied that the company was interested in being acquired.

However, CFC's CEO Angelo Mozilo appeared on CNBC and stomped on some of those good feelings. He failed to reassure markets, saying that the liquidity problem had not yet been solved and that the softening housing market could lead to recessionary conditions. The word "recession" echoed through the markets all day, with Mozilo's interview aired several times.

In addition, Standard & Poor's kept CFC on its credit watch list with negative implications. Moody's, another rating organization, put several homebuilders under review. Those included CTX, LEN and PHM.

Larry Goldstone, president and COO of Thornburg Mortgage, also appeared on CNBC today. Although the crawlers on the bottom of the screen featured bullets such as "Thornburg returning to business as usual," Goldstone affirmed that market conditions are still not normal. He said he was not interested in a deal like Countrywide's with BAC, however. He's afraid the pendulum might swing too far toward tightening credit, although he says he not a fan of too-easy credit, either. He admitted that his company has been trying to find a way to use their assets, assets he claims are exactly what the Fed is seeking, to secure loans through the Fed's discount window, but the company's many approaches to banks and other entities have not turned up a way to do so. In general, his tenor might have been labeled concerned but not alarmed.

The level of the infusions that central banks are pumping into the monetary system alarms some market watchers. Earlier in the week, I heard a commentator on CNBC Europe announce that the ECB had already pumped in much more than that central bank did after 9/11. Today, it was announced that central banks have infused more than $400 billion to promote liquidity.

The Independent Community Bankers of America worked hard today to position their 5,000 member community banks apart from those financial institutions experiencing difficulties. The association's president and CEO affirmed that our nation's highly capitalized and regulated and well run community banks have mostly avoided risky subprime lending practices. They're doing fine, the association's president affirmed, and they remain able and ready to make loans to small businesses and consumers.

This article won't cover company-specific developments in any detail, since those developments are not what are moving the market these days unless they're related to the credit issue, as the BAC and CFC development was. However, in addition to the companies already mentioned in this report, Ford Motor (F) did say that its turnaround plan could be hampered by current economic conditions.

Tomorrow's Economic and Earnings Releases

Although the week's economic calendar has been light, tomorrow ushers in one of the more important releases of the week: July's Durable Goods. The consensus has been for a rise of 1.1 percent after the previous rise of 1.4 percent. Some economic releases have been unexpectedly weak, beginning about a week ago, concurrent with the Fed's warning that the economy might have softened. It won't be good news to see unexpected weakness here, although market participants might be somewhat inured to bad news by now.

That release appears at 8:30. At 10:00, July's New Home Sales will be released. Those are expected to drop to 825,000 from the previous 834,000.

The ECRI Weekly Leading Index for the week of August 17 was released at 10:30.

What about Tomorrow?

On the Market Monitor, the live portion of the site, I explained today what I was doing with my and my husband's combined portfolio, and what I'm doing there impacts what advice I'm giving subscribers. As of several weeks ago, my husband and I went mostly to cash at my insistence. I'm engaging in fewer trades than normal and am effectively hunkering down, watching for stability that encourages me to move money back into investments. I haven't seen that stability yet.

I'm absolutely not advising that you all go to cash in your 401K's and IRA's. I'm not an investment counselor and we each have specific investment needs that differ, so what's best for me might not be best for you. Our investment goals are different than those of other people because my husband has just retired, it was time to reallocate assets anyway because of his retirement, and we're both conservative by nature. My sole purpose in revealing this is to say that I'm not going to encourage a lot of trades right now when I have deliberately hunkered down in my own accounts. I want my comments to have the ring of truth when I say that cash is a position, a decision, that's valid when you're uncertain about market conditions or directions. Perhaps I'm reading too much, but I'm uncertain about the state of the globe's financial markets and I want more clarity before I reinvest fully.

My advice is that you not enter a trade unless all the ducks are in a row for that trade. Make sure that if you're counting on a rollover, prices are jammed against known and strong resistance, so that you have a clear get-out point. If you're banking on a bounce, make sure that prices are resting on known strong support for the same reason. Consider keeping positions smaller than is typical for your account. Do not hold on, hoping for a reversal that doesn't come as prices speed the opposite direction of your play, but realize that in such market conditions, you could be whipsawed out of a play only to have prices reverse immediately after that has happened. Don't risk anything you can't afford to lose. I made sure I'm not, and I don't want you to do it, either.

With these cautions in mind, let's look at what the intraday charts say. Not a whole lot, it appears.

AAnnotated 30-Minute Chart of the SPX:

Annotated 30-Minute Chart of the Nasdaq:

Annotated 30-Minute Chart of the RUT:

These charts all show something approximating head-and-shoulders formations. Daily charts show candles indicating either indecision or a slightly or decidedly bearish cast, depending on the index. Taken on whole, the gains have taken on a choppy rising appearance after steep and brutal declines. It's hard to believe that such charts or such commentary will produce the desired V-bottom process, but stranger things have happened.br>
Until and unless the indices shown on these 30-minute charts break out of the channels in which they've been zigzagging, we really don't know much. Watch these charts and the daily ones, but perhaps more importantly, watch the USD/yen and TNX charts for guidance.

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