Markets Weaken As Euphoria Over Chinese Stimulus Fades

After a very strong opening, the US equity markets sold off through Monday. The session was marked by the absence of volume.

What helped the market to open strongly was news that included a massive stimulus package announced by the Chinese government, positive same-store-sales results from McDonalds (MCD) and the restructuring of the humongous financing agreement between AIG (AIG) and the US Treasury.

At the close, the DJIA (-73.27 -0.82% to 8870.54), the S&P 500 (-11.78 -1.27% to 919.21) and NASDAQ Composite (-30.66 -1.86% to 1616.74) were all down. The Toronto Composite gained a bit (+92.59 +0.96% to 9688.8), but the Venture Board (-7.86 -0.85% to 914.02) was down.

Energy (XLE) and Consumer Staples (XLP) gained +0.3% each, but were the only positive sectors. Basic Materials (XLB) was flat as Goldminers ($XAU +4.6%) gained a bit. Financials ((XLF) -3.0%), Cons. Discretionary ((XLY) -2.3%) and Utilities ((XLU) -2.4%) were the worst of the losers.

The REITs ($DJR -9.1%) and Broker-Dealers ($XBD -7.0%) were worst hit.

Money flowed into the safe haven of the US Bond market. $USB was up +1.10% to 117.64. T-Bill yield is no down to 0.20%!!!

The safer $USD (+0.19% to 86.08) rallied against the Pound ($XBP -0.17%) and Cdn Loonie ($CDW -0.42%). This morning though, the $USD is very strong (86.60) and the Euro is down to 126.90.

$GOLD had a good start to the day yesterday, but later came well off its high. Copper and Nickel prices were much stronger on the China stimulus program news. Today the precious metals, like the energy commodities are all down a lot.

Spot prices at 8:00am ET today for gold, palladium, platinum and silver (vs yesterday morning) are, respectively: 738.50 (752.22); 215 (224); 827 (872); and 9.90 (10.32). Definitely weaker. $GOLD futures are down -$10.40/oz to 736.40.

$WTIC crude oil futures are down to 59.70/bbl.

Earlier today, the Asia-Pacific markets were weak: Japan’s Nikkei 225 (-3.00% to 8809.3); India’s Sensex BSE 30 (-6.61% to 9839.7); Australia (-3.40% to 3921.8); Shanghai (-1.66% to 1843.6); and Hong Kong (-4.77% to 14040.9).

In Europe at mid-day, the equity markets are down sharply. The price at 8:00am ET: French CAC -3.00%; German DAX -3.00%; and UK FTSE -2.83.

DJIA futures are down -163 to 8724. The commodity-related sectors are likely to be hit this morning.

Comments & Outlook

There is no change in the underlying drivers in the equity market: (i) low volume, (ii) forced selling of under-margined and mutual fund-related accounts, and (iii) a slow acquisition of long positions by private capital and the strongest of the hedge funds.

The cycle bottom process may take until the end of tax-loss selling season in late December. In the meantime, being “nimble” is the key to success.

An observation I had watching Bloomberg TV is that investment analysts and talking heads are more down to earth, giving us less hype. It’s clear that there is no consensus decision by the heavyweight capital managers to move the market higher.

The best play in this market is to sell volatility and use the options market time decay to your advantage.

But, there is a selective repositioning of portfolios underway, which I see from the Effective Volume studies of my Belgian-based associate Pascal Willain.

Also, there are three keys to playing the volatility: (i) the T-Bill yield, which tells you money flowing into or out of safe haven of the US Treasury, (ii) the share prices of the oligopolist base metal miners like BHP, Rio Tinto, Vale, and Xstrata, and (iii) the share prices of the major Chinese/Brazilian oil companies versus Exxon (XOM) and Chevron (CVX).

I now believe that the most likely case for equity market prices is that they will be held in check by embattled fund managers until late December. A volume break-out will be the key to the price break-out.

Subscribe by RSS Subscribe by Email