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US stock indices slide

Last updated 2/10/2012 4:28 AM ET (GMT -5) 2 Comments

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David Morrison

Derivatives Market Strategist, U.K.

Friday 10th February 2012

Headlines

Oil and precious metals lower

Chart To Watch - Apple (AAPL)

As you can see from this weekly chart, Apple’s stock price has skyrocketed recently, breaking out of a long-term bull channel. This sort of price behaviour is often associated with speculative interest and there is little doubt Apple is experiencing this at the moment. This is a warning that a correction may be due, perhaps similar to the one silver experienced last year. With the grey metal, traders were citing the $50 mark as the turning point and with Apple it is $500. Silver was within touching distance of that milestone before the bubble burst. Apple is very close at $494. This is not to suggest that a top is in sight. Indeed, the fundamentals remain supportive and the stock market has a strong feel about it at the moment. But if trading Apple, it is something to consider.

GFT Inflation Indices

Most Actively Traded Instruments

Index	Commodity	Equity
Wall Street (.US30)	Spot Gold (.GOLD)	Vodafone (VOD.L)
Germany 30 (.DE30)	Spot Silver (.SILVER)	Barclays (BARC.L)
UK 100 (.UK100)	Brent Crude (.BRENT)	Apple (.AAPL)

UK and Europe

Market	Ticker	Price	Change	Percent
UK 100 Cash	.UK100	5852.0	- 43.0	- 0.73
Germany 30 Cash	.DE30	6693.0	- 96.0	- 1.41
France 40 Cash	.F40	3373.0	- 52.0	- 1.51

UK Market News

Asian Pacific markets closed mostly lower overnight. Traders trimmed their bullish positions in equities after European officials were left unimpressed by the latest Greek austerity plans that are needed in exchange for a new bailout. In addition, concerns were revived about the health of the global economy after the Reserve Bank of Australia trimmed its near-term growth and inflation forecasts. On top of this, trade data out of China showed imports slumped sharply in January and exports dipped for the first time since late 2009. Imports fell 15.3% year on year while exports slipped 0.5%. The drop in imports boosted the country’s trade surplus to $27.3bn from $16.5bn. It should be noted, however, that the numbers were significantly distorted by China’s New Year holiday last month. And for that reason, Chinese investors were unfazed as the leading Shanghai Composite Index eked out a small gain while other Asian Pacific markets closed lower. Hong Kong’s Hang Seng finished down 1.1%, Australia’s S&P/ASX fell 0.9% and Japan’s Nikkei slipped 0.6%.

European equities started the day lower as traders digested the implications of the latest Greek developments. Three main issues remain for the second bailout, which is worth €130 billion. Firstly, the austerity measures agreed yesterday between the Greek coalition and the troika needs the approval of the Greek parliament, and voting takes place on Sunday. Second, Athens must find an additional €325 million in cuts by Wednesday, when finance ministers of the euro area meet again. And finally, Greece must guarantee that these reforms will be fully implemented. These three elements need to be in place before any decision is made by the troika. The “haircut” issue is another problem which is still on-going. Private bondholders are being asked to accept a much larger write-down than they are comfortable with.

But the problem is that although a majority of the Greek people still want to remain in the euro zone, they are just fed up with austerity and don’t believe it is helping. Investors are also tired of Greek wrangling and are doing everything they can to divert the focus onto something else. Unfortunately the latest economic data out of China and the US have not helped their cause much. Meanwhile it has been a mixed day in terms European data. The most important release was the UK Producer Price Index, which came out above forecast, raising fears that next week’s CPI will overshoot expectations. Both PPI input and output prices rose 0.5% in January, topping expectations of +0.4 and +0.1 percent, respectively. The data supports arguments that the Bank of England may have underestimated inflation after it increased quantitative easing by an additional £50 billion yesterday. From Europe, German Final CPI was unchanged at -0.4%, as expected; Swiss CPI also came in at -0.4% vs. -0.3%. French Industrial Production fell 1.4% in December, which was more than 0.8% expected. The Italian figure was surprisingly +1.4% on the month but -1.7% when compared with the same month a year earlier.

Big Winners

Big Losers

US Indices

Index	Ticker	Price	Change	Percent
US Wall Street Cash	.US30	12,766	- 125	- 0.97
US 500 Cash	.US500	1,340.0	- 12.0	- 0.89
US Tech 100 Cash	.USTECH	2,548.0	- 16.0	- 0.64

US stock indices ended largely unchanged yesterday. The S&P 500 eked out a gain of 0.2% while the Dow closed flat. But the Nasdaq outperformed slightly as it gained 0.4%, boosted by Apple. Traders appeared reluctant to establish fresh positions in equities as the major indices neared major resistance levels. They were also waiting for the outcome of the meeting between EU finance ministers and Greece after the country’s coalition reached a deal on austerity measures needed for a new bailout.

But there are concerns that the Greek deal falls short of the troika’s requirements, and this puts a question mark over the release of the second bailout tranche, and the private sector bond swap. For this reason, stock index futures were sharply lower this morning. Also, there are renewed concerns about the health of the global economy after the Reserve Bank of Australia trimmed its near-term growth forecast and China’s imports plunged more than 15% in January. As far as US data is concerned, we saw the release of Trade Balance, Consumer Sentiment and Inflation Expectations today. Trade deficit widened in December to its worst level since July 2008, rising to $48.8 billion from $47.1bn in November. The Preliminary UoM Consumer Sentiment was 72.5 in February, down sharply from 75.0 the month before, and below expectations of 74.4. Inflation Expectations fell to 3.2% from 3.3%. Federal Budget Balance is due at 19:00 UK time. Ahead of that, Fed Chairman Ben Bernanke speaks about the housing market at 17:30.

Following the disappointing data releases, the major indices extended their losses by midsession.  Some would say today’s sell-off has long been overdue. The indices are all looking overstretched to the upside. Would-be buyers are desperate for a pull-back as no one wants to risk going long at a potential market top. Yet with the Fed pledging to keep rates low for the foreseeable future, plus holding the door open to further stimulus (despite improving economic data), equities remain an attractive prospect for investors. But it is worth remembering that the earnings season has been mixed so far and analysts are anticipating slower earnings growth next quarter. While bullish investors argue that P/E multiples are relatively low, it is worth remembering that the developed world is now firmly stuck with a zero rate interest policy, and still relies on central bank intervention to backstop a crippled financial system. Today we saw disappointing results from Nuance, Expedia and True Religion. But numbers from LinkedIN, Barclays and NYSE Euronext all came out ahead of forecasts.

Technical Outlook - Dow (.US30)

The Dow is currently testing the high point reached back in May. But the rally looks overstretched and several technical indicators suggest being cautious at current levels. The first warning sign is that the index has made a higher high while the MACD has made a lower high, as highlighted by the red arrows. This is telling us that the rally’s momentum is fading near a potential level of resistance. The small candles with relatively large wicks mean neither the bulls nor the bears are in full control. The Relative Strength Index is currently above 70, which is an overbought level.   In addition, investors appear complacent over the Greek austerity deal, bond swap and potential for a contained default. But if the index does manage to break decisively higher, then the rally could extend much further. So if you are bearish, make sure you have your stop in place some distance above the 12923 high.

Commodities:

Precious Metals:

Market	Ticker	Price	Change	Percent
Spot Gold	.GOLD	1719.0	- 10.5	- 0.63
Spot Silver	.SILVER	3365.0	- 26.0	- 0.76

Gold and silver are both lower today. After hitting a two month high yesterday, the euro has fallen sharply as investors react to the farcical situation in Greece. The government of national unity reached an agreement over additional austerity measures yesterday, paving the way for the release of the second bailout fund from the EU/IMF/ECB troika. However, euro zone finance ministers have said that the Greek budget deal is incomplete and this has raised the prospect of a default. Precious metals fell along with the euro as investors trimmed back their exposure to "risk assets", at least those traded on margin. This is despite the CME announcing a cut in margin requirements for both gold and silver. Gold has failed to break above resistance around $1,760 on a few occasions now, and this has led to further selling. Support should come in around $1,705 to $1,695. Meanwhile, silver has failed to hold above $34 although support is holding around $33 for now.

Crude Oil:

Market	Ticker	Price	Change	Percent
Brent Crude Oil Spot	.BRENT	11684	- 166	- 1.41
WTI Crude Oil Spot	.WTI	98.55	- 1.33	- 1.33

Crude oil has fallen sharply today, and the main reason is euro weakness and dollar strength. Greek politicians have managed to agree to additional austerity measures. But their proposed budget has failed to satisfy EU finance ministers. This has seen speculators reduce their exposure to risk assets in general on rising worries of a Greek default. On top of this, the International Energy Agency has cut its outlook for the growth in oil demand for the sixth successive month. China's trade surplus rose sharply as imports declined over 15% year-on-year and exports also dipped slightly. Although the numbers were distorted by fewer working days due to the Chinese New Year, there are concerns that growth is weakening. This comes on top of news earlier this week of a surprise jump in inflation. WTI has failed to break above $100 while support continues to hold around $96.60 – the 23.6% Fibonacci retracement of the October-November rally. Brent bounced off support around $116, while $119.50 is currently resistance.

Looking forward - Monday 13th February

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Comments (2)

Darkdoji

February 13, 2012 at 08:03 AM ET

Plenty to consider here - but AUD was housing loans not retail sales for event risk Monday. Past and gone with negligible impact. I guess it was a typo. Cheers

dmorrison

February 13, 2012 at 08:09 AM ET

Thanks Darkdoji - wrong calendar, sorry about that.

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About The Author

David Morrison has worked in financial markets for over 25 years. He has been instrumental in setting up two spread betting companies. He has managed trading desks and has implemented and run successful risk-management strategies. He has appeared on Bloomberg TV and has written numerous articles covering economics and trading strategies using fundamental and technical analysis. He joined GFT in February 2009 to deliver commentary and research for derivatives products, and trades on his own account.