Yesterday’s rebound turned out to be as short-lived. All three major indices finished this option expiry date lower by at least 1.8%. For the week, the Dow was off by more than 450 points and closed at levels not seen since early March. The S&P 500 and the Nasdaq were faring relatively better compared to the Dow and were down 3.1% and 2.0% respectively for the week. It should be noted that the S&P now is in negative territory for the quarter and is down by more than 10% for the year. There is little economic news in today’s session. Selling in overseas markets amid deepening concerns about the financial sector was cited as the main reason behind today’s weakness.
All major sectors were closed the session lower by at least 1%. Energies were no exception in spite of a $2 rise in crude oil ahead of a meeting for oil producers in Saudi this weekend. The CRB commodity index regained most of the loss from the previous session and for the week it was up 2%. The US dollar was lower against most major currencies as traders were increasingly convinced that the Fed would only use words rather than actions to calm down inflation. Treasuries rallied across the board as some flight to quality was going on. The VIX index jumped almost 6% but it was still too low for a capitulation rally to occur. One thing that did get a little extreme was the number of news lows on NYSE and Nasdaq. The combined figure was exceeding 500. But back in January and March, the figure surpassed 1000 in both cases. Another technical indicator that showed some pessimism is the Dumb Money reading, which reached 29% yesterday and reflected pessimism among small investors. Given next week we are going to have the FOMC meeting, more volatility should be a safe bet.  

The market had a modest rebound this Thursday. The Nasdaq, led by some big tech names, advanced more than 1.3% while in comparison, both the Dow and the S&P 500 were up around 0.3%. The news on the economic front was mixed this morning. Initial claims for the week ending June 14th came at 381K, a decreased of 5K from the previous week’s revised figure of 386K. It was higher than economists had called for but still stayed within the range of estimation. The continuing claims, on the other hand, dropped 76K to 3.06 million in the latest week. In a separate report, the Philadelphia Fed’s survey for June dropped to -17.1 from -15.6 in May. Economists were expecting an improvement to -10.0. Lastly, the leading index increased slightly in May. Positive developments in interest rate spread and stock prices offset areas such as declining real money supply and building permits. It should be noted that the coincident index also increased slightly in May, which marked the first increase in 7 months.
Transportations and technologies were among the biggest winners in today’s session. The former was aided by an almost $5 drop in crude price, which was triggered by China announcing plans to raise fuel costs in an attempt to restrain economy. Not surprisingly, energies were the only major sector that ended the session in negative territory. Financials, after being hammered earlier by news that Citigroup is going to make more write-downs, reversed its course and ended the session higher. Strengths in the financial sector helped to move the broad market higher in the afternoon. The CRB commodity index ended the session lower by 1.7%. The US dollar was mixed against the major currencies while treasuries were sold off after gaining in each of the previous three sessions. The market breath was neutral to positive and the volume was on the heavy side.

The market dropped for the second day in a row. The Dow is now barely above the psychologically important 12000 level and closed at the lowest level in three months. Unlike yesterday, there is little economic news. Several disappointing earnings reports along with a rise in crude price were cited as the main reasons behind today’s drop. On top of that, RBS told its clients to prepare for a crash in global stock and credit markets over the next three months. The bank warns that the S&P 500 is likely to drop more than 300 points by September. That certainly made investors more nervous about holding stocks.
Commodities were once again outperforming the broad market. The CRB commodity index climbed more than 1% and closed at a new high. On the losers’ list, we had names such as consumer cyclicals and technologies. Financials were hit hard most time of the day but were able to recover a little bit by the close. The US dollar continued to retreat as traders trimmed their bets on interest rate hikes by the Fed. Treasuries rallied across the board. The VIX index, which is usually used as a fear indicator, jumped 5% in today’s trading but it was still not high enough to trigger a capitulation rally. The market breath was decisively negative.

The market couldn’t hold onto its early gains amid continuous worries in the financial sector. All three major indices were lower by around 0.7% by the close. It was a busy day in term of economic news but unfortunately, most came short of expectation. Start with the closely watched housing data. The Housing Starts for May dropped to an annual rate of 975K from a revised 1008K in the previous month. That was lowest reading in 17 years and below economists’ forecasts. To be fair, based on data from the previous cycles, the Housing Starts almost always dip below the 1 million mark before a meaningful rebound can be anticipated. Given the degree and scale of the latest housing boom (or bubble), it might require the number to go well below 1 million for the new balance to be achieved. In other words, it is a safe bet that we are going to see even lower Housing Starts in the months ahead. In a related note, Building Permits for May fell to 969K from a revised 982K in April. Move on to the inflation front. Here the picture was not pretty either. The headline PPI for May jumped 1.4%, exceeding 1.0% expected by economists. Excluding food and energy, the core PPI came at 0.2% vs. 0.2% expected. Year over year, the PPI increased 7.2% vs. 6.5% a month ago. Finally, the industrial production for May decreased 0.2% following a drop of 0.7% in April and economists called for an increase of 0.1% instead. The capacity utilization rate, meanwhile, dropped to 79.4% from a revised 79.6%.
Commodities were among the biggest winners of the day. The CRB commodity index hit a near high led by agriculture products. Crude price dropped for the third straight session at this option expiry date but it was less than 5% below the all-time high reached early yesterday. The US dollar continued to slide against major currencies. Articles from Wall Street Journal and FT suggested that traders probably were ahead of themselves in terms of interest rate hikes. As a result, treasuries rallied across the board and the chances of rate hikes in the next few Fed meetings were reduced. The VIX index was little changed while the breath was negative.

The market started the new week in a lackluster fashion. The S&P500, which was hovering around the unchanged level most of the day, ended higher fractionally. The Nasdaq, led by some big techs including Rimm and Apple, outperformed the board market and advanced 20 points. The news on the economic front was mostly negative. The NY Empire State index dropped to minus 8.7 from minus 3.2 while economists expected a small increase. In a separate report, the National Association of Home Builders sentiment index fell to 18, a record low, from 19 in May. Economists were looking for an unchanged reading. As the sentiment index usually acts as a leading indicator to the housing market, a record low reading certainly doesn’t bode well for the sector in the near future. Lastly, net foreign purchases for April increased to $115.1 billion from a revised $79.6 billion in the previous month. The US dollar reached a record low level against the euro back in April but that was not enough to deter foreign investors from purchasing the US assets. 
Energies were leading the market despite a nearly $6 reversal in the crude price. Earlier, the crude hit a new record high and was just cents away from the $140 mark. Since tomorrow is the July crude option expiry date, more volatility in the energy market should be expected. The CRB commodity index closed at a new high today, partly helped by a weak dollar. Over the weekend, there was no strong message regarding the dollar coming out of the G-8 meeting as some traders had feared ahead of the meeting. But given the sizable rise in the dollar last week, a pullback is not surprising at all. Treasuries initially rallied over the weak-than-expected reading in the NY Empire State index but later were ending the day essentially unchanged. We are going to get the Fed meeting next week and currently there is about 20% possibility that the Fed is going to increase the interest rate at that meeting. Obviously we don’t’ expect that to happen and it will really be a shock to the equity market if that does happen.