Editor's note:
this column was originally published on Capital Essence's CEM News on January 17, 2008. It's being republished as a bonus for the loyal readers. For more information about subscribing to CEM News, please click here.
Good Morning. This is Capital Essence's "Market Outlook" (the technical analysis of financial markets) for Friday January 18, 2008.
The 2002 cyclical uptrend in the
US equities market, as measured by the S&P 500 Index, is officially over after Thursday closing bell.
Overall it was a terrible day on the Street with all ten economic sectors posted a loss in excess of 1%.
For the day, the Dow Jones industrial average plunged 306 points or 2.46%.
The broader market, S&P 500, index lost 2.91% to finish at a fresh 52-week low. The NASDAQ Composite fell 1.99%.
For the record, this was only two days after we've noted that: "
the near term outlook in equities market is pretty miserable. Technical background suggests that stocks are looking at more declines" — see "
The bears remain largely in charge"
January 16, 2008.
Interestingly, despite the overall weakness, shares of Excel Maritime (
EXM) and Vca Antech (
WOOF), profiled in our "
Swing Trader Bulletin" as potential buy candidates, all posted nice gains for the day, up 5.98% and 2.52% respectively.
Contributed to the day's huge loss were the ongoing worries about further financial market turmoil and a slowing economy. Speaking of financial, shares of Merrill Lynch & Co (MER) fell 10.25% to $49.45 after the banking giant posted a huge loss of $10.3 billion in the fourth quarter, which were largely due to the $11.5 billion write-down for subprime and CDO exposure and a $2.6 billion credit valuation adjustment related to its hedges with financial guarantors.
Regard to guarantors, shares of monoline insurers tank today on news that rating agencies are considering downgrade the credit rating of these companies. Ambac Financial Group (ABK) was the hardest-hit, dropping off 55% after the company said that they probably won't be able to raise capital in the manner in which they expected amid Moody's plans to review the company's credit rating for a possible ratings cut. Clearly, this is not good news for financial stocks and the market. But, "why and what this has to do with banks?" you might be wondering. We've all known that Merrill and other financial institutions have been aggressively writing down the "un-hedged" exposure to subprime CDOs (collateralized debt obligations), but there is another area that has not been touched, at least for the time being, which is the "hedged" exposure. Merrill reported that it had bought about $20 billion worth of credit default swaps or put options on CDOs. In plain English, the firm will be, theoretically, protected if the CDOs turn south.
And the problem is: the counterparty or sellers on most of these credit default swaps are a small group of monoline insurers like Ambac. This means if Ambac and other monoline insurers bankrupt, which is very likely if they're unable to raise fresh money, all the "supposed protection" that financial firms bought may be worthless and if so, they may have a lot more exposure than previously thought. And this is the reason behind Merrill's 10% haircut and 4% drop in the financial sector today.
Chart 1.1: Bank Index (weekly).
We've
offered right here a couple days ago that: "
[while the short-term] action is encouraging…this is a buy signal [within a context of a long-term] bear trend."
The bank picked up where it left off Tuesday, stumble 4.71% Thursday.
The index is testing the key price level at area of previous bullish breakout point, around the 2002-2003's low.
Expect some sorts of consolidation in this area.
Chart 1.2: Standard & Poors 500 Index (weekly).
As goes the bank, so goes the tape. The S&P dropped almost 40 points on the extended financial market turmoil. It worth notice that, the bears had finally achieved something that they weren't able to do in the past couple of years – pushing the index below the previous year's lowest closing level (the lowest close in 2007 was 1374.12). This is a clear indication of a change in the underlying trend [from bullish to bearish, of course]. Technically speaking, today trading action had put the last nail into the bull's coffin. Right now, the most obvious level to watch is the 2006's closing low, about 1223.69. Short-term resistant is about 1400.
Chart 1.3: Dow Jones Industrial Average (daily).
The blue-chip index isn't quite there. It's merely 100 points away from the 2007's closing low of 12050.41. Again, a violation of this level on closing basis will put the index into the same playing field with the S&P. Short-term resistant is about 12600.
In summary: no need to sugar coating, Thursday's trading action is very bearish – investors seemed to dump anything under the sun, as fast as they could. The action is indicative that we're at or pretty near the all-out panic state. And this is good news, at least in the short-term, because the market often produces a swift turnaround reaction immediately after the last seller had completed the transaction. Just before you push that buy button, bear in mind that Thursday's breakdown had put that last nail into the bull's coffin and this [upcoming bounce] could be just another selling opportunity.
Until next time, good luck.
(By: Michelle Mai for Capital Essence)
Note: Michelle Mai writes technical analysis for Capital Essence and is the editor of Capital Essence's "Market Outlook" newsletter. To receive the daily edition, please
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