The stock market turbulence of the last few weeks and what has now been termed ‘the credit crunch’ would, on first glance, seem to have ended. The credit crunch was at its worst on 16th August when the Fed lowered its discount rate (the rate at which it lends to banks) by 0.5%, clearly sending a message that, if faced with a severe risk to the economy, it would do whatever it had to do.
That Fed action caused a huge intra-day reversal. At its lows, the Dow was down very significantly at 12518 but it then closed that day much higher at 12845. For the next couple of weeks, markets trended sideways and then the Fed acted again surprising the market by cutting the Fed Funds Rate by 0.5%. This unexpectedly large cut caused another significant one-day move up. Since then the market has again consolidated. The Fed actions caused panic to abate and although business is far from back to normal, there is more confidence and importantly, at least some more liquidity.
So is it all over and are markets now set to go much higher? We think not, because the turbulence and extraordinary events associated with it; the run on Northern Rock and major banks refusing to lend each other money, marked a key long-term turning point. It signalled the end of the credit expansion and the onset of credit contraction.
Importantly, some of the key sectors of the stock market have been noticeably absent from the positive action. The UK General Retailers sector has not participated in the post-Fed-cut euphoria; quite clearly, this sector of the stock market is a bear market suggesting that the outlook for British retailers is bleak, hardly what you would expect to see if the economy was in good shape.
The banking sector is another UK stock market sector bear market. Is it worrying about bad loans and falling profits? Natural consequences of a slowing economy.
The real estate sector is also a bear market. If the economy is to continue growing healthily, why would this sector have such a poor view about the future wellbeing of UK commercial property?
House builders: Barratt Developments (BDEV) is typical of house builders generally and is another bear market – unfortunately there is no specific sector for house builders.
At times of concern, investors tend to gravitate towards the larger cap stocks whilst avoiding small caps. Just look at the two charts. FTSE which, although still below its July high, has recovered about two thirds of its losses suffered from July to August. Compare this to the FTSE Small Cap Index, still near its August lows – a bear market.
Because of exposure to the Société Générale Global Index Bear Accelerator RHAM portfolios will, if we are right about what’s going, benefit hugely.
Our Four Horses of the Financial Apocalypse have temporarily quietened down; the stable boys – Bernanke, King and Trichet – nervously advance still hopeful of securing them before they escape permanently into the wilderness.
The white horse – false peace – The Volatility Index (VIX)
In a previous issue, number 548 dated 5th July 2007, we explained that the 30-week moving average, as a technical indicator, has huge relevance. When prices are, broadly speaking, below the 30-week moving average, expect markets to be weak and when prices are supported by the 30-week moving average, expect prices to move ahead. You will see from the 5-year chart that the 30-week moving average still supports price action, even though the most recent action has come back to below the support level of 20. If the 30-week moving average holds, then we should be close to the next upward VIX surge and sharply lower equities.
The red horse – war and destruction – The Philadelphia House Market Index
It’s hard to believe that optimism still exists for the American economy with their house market in such awful disarray.
• According to the National Association of House Builders, confidence amongst house builders is at an all-time low. Developers’ expectations for fresh demand have dropped for the seventh consecutive month to its lowest since records began 22-years ago.
• Existing home sales in August were down 4.3% to an annualised rate of 5.5 million. The only good thing about that number is it was slightly better than had been feared.
• In September inventory of unsold houses rose to 10 months’ supply at current sales levels. This compares to 9.5 months’ supply in August.
• Standard & Poors Case-Shiller House Price Index for July was down 3.9 year-on-year, the twelfth consecutive monthly fall and that number was calculated before the turbulence hit the credit markets!
• August new home sales fell a worse than expected 8.3% from July to a seasonally adjusted rate of 795,000 units, the lowest level since June 2000.
By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit https://www.rhasset.co.uk/