Interdum stultus opportuna loquitur...

Wednesday, September 01, 2004

No Fear... be Very Afraid

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Markets started out soft, but at midnight Australian time they took off with a bit of a roar.

This struck me as odd... although the timing was right (midnight), the Federal Reserve's repo desk only did a $4.25 billion repurchase (with $4.18 billion in T-backed collateral). I suppose that with the market as thin as it is, $4.18 bill might be considered enough to provide some grease for the jamjob, but it wasn't something I would try and bet on.

Economic data was mixed: the Institue of Supply Management survey was reported at a reading of 59, compared with a consensus estiamte of 60 and last month's level of 62. The Mortgage Bankers Association reported that their measure of housing sector activity fell 0.6%, but Construction Spending numbers released by the US government showed an increase of 0.4% for the month.

Anyway, after the early weakness the rampjob at midnight our time was pretty impressive, with the S&P rising 7 points in half an hour. For most of that time, the TICK indicator was hitting extremely high levels (>1000) and the whole thing looked pretty "iffy".

The thing went basically sideways-to-down for the next two hours or so, until news hit the pits (but not the newswires) that there had been some sort of localised illness at a building in Washington. Folks naturally thought "What if...?" and the S&P dropped like a rock, slicing down through 1100 as if round numbers didn't matter.

Where the jamjob at midnight had the hallmarks of "da Boyz", the drop at 3 a.m. (8 points in 15 minutes) was clearly marked "Ensign, please pass me my brown corduroy trousers".

Someone big stepped up as the S&P futures hit 1098, and just started buying everything that was on offer. It was almost an hour later that the newswires carried the story; some juvenile turd had apparently sprayed Mace or pepper spray ito the lobby of a building, which is what had made people feel crook.

No Osama-plot, no bioterror event... and folks who threw down short scrambled over each other to cover shorts... the squeeze was on. The market clawed all of the 8 point drop back in very short order, and then pretty much went sideways around the unchangd level for most of the rest of the session. With half an hour togo, da Boyz gave it a bit of a goosing, trying to get the Dow to close "green", but they fell just short.

The behaviour of the market in repsonse to the potential "terror event" got me thinking: where is the fear? Why is there no "margin of safety" in equity prices? The market is trading at valuations close to those of 1929 (in terms of PE, dividend yield and price-to-book) despite a genuine risk of a catastrophic "event"... and yet everybody seems extraordinarily sanguine.

If anything actually did happen, the brown corduroy trousers would be very badly soiled indeed. Most of the carnage would happen to people who can least afford it (the 50-somethings who have 65% of their retirement assets in equities) at a time when the structural budget deficit is so startling that the US government faces the real possibility of reneging on its Social Security (pension) undertakings.

Anyhow - as I mentioned, there was a last-minute attempt to drive the Dow into positive territory for the close; it failed. The Dow Jones Industrial Average lost a meagre 5.46 points (0.05%), closing out the day at 10168.46 points; the broader S&P500 Index gained 1.67 points (0.15%), finishing the session at 1105.91.

In Tech-Land, all was forgiven for Intel - after all, the Penguin Parade of downgrades was, like, yesterday. Overall, the Nasdaq Composite gained 12.31 points (0.67%), to close at 1850.41, and the Nasdaq100 Index adding 9.28 points (0.68%), to end at 1377.96 points.

The broader stock market measures rose: NYSE Composite Index gained 15.64 points (0.24%), closing at 6469.86, while the broadest measure of US equities, the Wilshire 5000, posted a gain of 29.72 points (0.28%), finishing the session at 10748.87

NYSE Volume was weak again, with 1.14 billion shares crossing the tape, while Nasdaq Volume was only slightly short of average, with 1.42 billion shares traded (averge volume is about 1.6 billion shares).

S&P500 Index1105.911.670.15%
Nasdaq Composite1850.4112.310.67%
Nasdaq100 Index1377.969.280.68%
NYSE Composite6469.8615.640.24%
Wilshire 500010748.8729.720.28%
NYSE Volume1.14bn--
Nasdaq Volume1.42bn--
US 30-yr yld4.93%0%-0.08%

On the NYSE advancing issues outpaced decliners by 2071 to 1223; Nasdaq gainers outpaced losers by 1836 to 1203.

NYSE advancing volume outpaced volume in decliners by 7:4 - 716.92 million shares traded in issues which were up for the day, versus 405.52 million shares in the day's decliners.

On the Nasdaq advancing volume was more than double volume in decliners: 562.8 nillion shares changed hands in socks that gained on the day, while 222.01 million were traded in stocks which were down on the prevous close.

124 NYSE stocks posted new 52-week highs, and just 5 set new 52-week lows/ In Nasdaq-listed stocks there were 95 stocks which ran to new 52-week highs, and 38 plumbed new 52-week lows.

Advancing Volume (m)716.92562.8
Declining Volume (m)405.52222.01
New Highs12495
New Lows538

Equity call option volume fell and put buying jumped; much of the put buying happened near the low (after the "pepper spray" incident). The single-day equity put-call ratio rose to 0.92.

Option Implied Volatility indices fell for both OEX options and Nasdaq100 options. The VIX is at levels usually associated with significant downward reversals, however other sentiment indicators are mixed.

Equity Call Volume1.53m-0.18m-10.71%
Equity Put Volume1.41m0.22m18.93%
CBOE Volatility Index14.91-0.38-2.49%
CBOE Nasdaq Market Volatility Index22.65-0.27-1.18%

Bonds rose at the long end, with the benchmark US 30-year bond yield shedding about a basis point to 4.927%. The rest of the yield curve experienced moves of similar magnitude, leaving the slope of the curve relatively stable (in fact it is slightly flattening, but not enough to be of concern at this stage, except if you're a "carry trader").

UST 2Y (yld)2.379-0.02-0.83%
UST 5Y (yld)3.295-0.02-0.66%
UST 10Y (yld)4.116-0.01-0.29%
UST 30Y (yld)4.927-0.01-0.18%

The Banks Index lost 0.73 points (0.74%), finishing the session at 98.43; within the index,

  • the Derivative King - JPMorganChase lost $0.33 (0.83%) to close at $39.25; and
  • Citigroup lost $0.09 (0.19%) to close at $46.49

Interestingly, Citigroup was among the day's leaders in terms of negative money flow; that is, the net value of stocks sold on downticks versus upticks. The indicates that large bets were being taken on a fall in Citigroup.

The Broker-dealer Index lost 0.78 points (0.62%), finishing the session at 124.11; the ticket clippers lined up as follows -

  • Merrill Lynch gained $0.25 (0.49%) to close at $51.32
  • Morgan Stanley Dean Witter lost $0.39 (0.77%) to close at $50.34
  • Goldman Sachs lost $0.44 (0.49%) to close at $89.21
  • Lehman Brothers lost $0.12 (0.16%) to close at $73.77

Morgan Stanley was another of the stocks which were among the leaders for negative money flow (along with Bear Stearns and Prudential).

The Philadelphia SOX (Semiconductor) index gained 3.14 points (0.85%), finishing the session at 374.16

  • Triquint gained $0.11 (2.89%) to close at $3.91
  • Micron Technology gained $0.11 (0.96%) to close at $11.62
  • Intel gained $0.14 (0.66%) to close at $21.43
  • Altera gained $0.17 (0.9%) to close at $19.09
  • JDS Uniphase gained $0.02 (0.64%) to close at $3.13

Intel - along with major brokerages and banks mentioned elsewhere - was among the leaders in the negative money flow stakes today. That is interesting, given the relative strength of the tech sector today, and the fact that there was some decent buying in out-of-the-money calls on Intel: dumb money at work on the buy side?

Other indices popular with the beta-chasers were up, with the

  • Biotech Index gained 7.91 points (1.6%), to 503.58
  • the Hi-Tech Index gained 3.16 points (0.75%), at 424.85

Gold weakened by $1.70 (0.41%), however the Gold Bugs Index added 0.26 points (0.13%), closing at 207.65. Silver rose $0.02 to close at $6.81 per ounce. The Gold and Silver Index (XAU) gained 0.55 points (0.58%), finishing the session at 95.34

PHLX Gold and Silver Index95.340.550.58%
AMEX Gold BUGS Index207.650.260.13%

Oil was firmer, rising by $1.59 per barrel, closing at $43.81 per barrel after trading as high as $44.40 a barrel during the session. The Oil and Gas Index (XOI) gained 7.2 points (1.13%), to end at 646.65, while the Oil service stocks (OSX) Index gained 2.52 points (2.29%), finishing the session at 112.35

Reuters CRB282.54.51.62%
Crude Oil Light Sweet43.811.593.77%
AMEX Oil Index646.657.21.13%
Oil Service Index112.352.522.29%
US Dollar Index88.92-0.04-0.04%
Japanese Yen109.520.440.4%
Australia Dollar0.703-0.0017-0.24%
Swiss Franc1.2603-0.006-0.47%

France's benchmark CAC-40 Index gained 18.95 points (0.53%), finishing the session at 3613.23, while the German DAX-30 Index ran a bit harder, adding 32.41 points (0.86%) to close at 3817.62

The Poms ran their index the hardest of the Western European indices, with the FTSE-100 Index gaining 42.7 points (0.96%), finishing the session at 4502.