Picking up where they left off on Friday, equity and commodity markets have continued to sell off this morning apparently on continued fears that the credit crunch may lead to a global economic slowdown. Today, a number of major levels are being tested in the equity markets including 10,000 for the Dow Industrials (US30 CFD), the NIKKEI (Japan225 CFD) and the S&P/TSX Composite, and 1,000 for the S&P 500 (SPX500 CFD). Similarly, in commodity markets, crude oil has been testing the $90.00/bbl level, while copper has been testing $2.50/lb.
These broad-based declines, however, may be starting to set up conditions for a potential trading rebound into the autumn. Recall that each calendar quarter this year has seen a significant market drop in the month before earnings season, followed by an earnings season rebound as results turned out to not be as bad as markets had initially feared. Also note that, traditionally, September has tended to be the worst month of the year for equities and that equity markets tend to set their lows for the calendar year in September or October.
While it appears possible that the key levels noted above may be taken out in the short term, additional declines may create a final shakeout of weak hands or a selling climax, and may open up the possibilities for bear trap lows. A number of developments over the weekend suggest that the credit crunch may be nearing an end.
While two European banks, Belgium’s Fortis and Germany’s Hypo Real Estate, the problems of these two institutions were well known by the markets and no new names appeared to get into trouble. Meanwhile, on this side of the Atlantic, a war has been brewing between Wells Fargo and Citigroup for Wachovia. Hartford Financial has rallied after receiving a $2.5 billion capital investment from Allianz. In addition to banking, takeover activity started to increase in other areas with Bank of Nova Scotia agreeing to purchase Sun Life’s 37% interest in CI Financial for $2.3 billion, Eli Lilly agreeing to purchase ImClone for $6.5 billion, EBay purchasing two companies for $1.2 billion and Patterson Companies making a small acquisition. Combined, these developments suggest that not only are some companies apparently starting to see value in the marketplace, but also that that they now seem to be able to access capital for acquisitions. This suggests that the credit crunch may be easing and that the global banking system may be starting to work again.
There are also some technical signs that suggest markets may be nearing a point where support may start to appear. First, a number of equity indices, such as the Dow Industrials (US30 CFD), have completed common 62% retracements of the 2002-2007 bull market. Second, despite equity indices in the U.S. breaking down to new 52-week lows, positive MACD and RSI divergences have been building, which suggests downward momentum may be slowing. Third, despite significant market swings, last week’s trading volumes were lower than in the mid-September sell off. Friday’s big reversal took place on the second lowest volumes of the week, providing another sign that selling pressure may be easing.
Generally speaking, uptrends tend to end when buyers run out of money and downtrends tend to end when sellers run out of stock. So, what are some of the signs that may show investors of a potential turn? Intraday reversals, such as the negative one seen Friday can provide indications of changing sentiment. Also market reactions to news can be significant. At some point, markets may stop going down on bad news, which could be viewed as a sign of exhaustion among sellers.
Some key support areas to note for indices that may be tested include 9,700 to 9,800 for the Dow, 1,040 or 1,000 for the S&P 500, 9,400-9,600 for the S&P/TSX Composite, 1,300 to 1,400 for the NASDAQ 100 (NDAQ100 CFD), and 575 for the S&P/TSX 60 (Toronto60 CFD).
Commodity prices have been quite mixed. Base metals and grains have been under particular selling pressure with copper dropping 7.6% to test $2.50/lb and soybeans dropping through $10.00/bushel and falling 5.1%. On the other hand, gold appears to benefiting from a flight of capital from equities as it has been climbing within its $875-$925/oz trading range. Crude oil, interestingly, has been attracting support near the $90.00/bbl level and a double bottom may be forming. Note that should $90.00/bbl for crude falter, a cluster of long-term potential support levels appear in the $80.00-$85.00/bbl range.