Friday, 28 August 2015

Markets rally after stocks become cheaper

The Shanghai Composite Index jumped 5.3 percent on Thursday. Government buying was suspected to have been behind the rally.

The market rally in China helped shares gain elsewhere as well. In the US, the S&P 500 jumped 2.4 percent, capping a two-day gain of 6.4 percent, the best since the bull market began more than six years ago.

Some analysts think there could be more volatility ahead. JPMorgan Chase & Co. derivatives strategist Marko Kolanovic warned that “price insensitive” program traders are likely to cause repeated selloffs in coming days.

However, other analysts think the worst may be over.

“We got our pullback, and now we’re going to focus on U.S. things like GDP and the Fed,” said John Canally, chief economic strategist at LPL Financial Corp. in Boston. “When you’re in a correction, it’s not fun, but when you’re out, you can refocus on what matters.”

Lower prices could help stocks rally further.

Stocks are “screamingly attractive”, according to Tobias Levkovich, Citigroup’s chief US equity strategist.

Jonathan Golub, chief strategist at RBC Capital Markets LLC, told Bloomberg: “Those things that you probably liked before you should like now at cheaper prices.”

In any case, Laszlo Birinyi thinks that valuation metrics such as the cyclically adjusted price-earnings ratio championed by Robert Shiller have underestimated the perfomance of stocks. Rather, sentiment is as likely to drive prices as anything else.

“Our bottom line is that many market metrics and indicators are based on a cyclical environment which no longer exists,” he wrote in a note to clients on 5 August.

Thursday, 27 August 2015

Chinese stocks fall again but US stocks rebound

Chinese stocks fell again on Wednesday, the Shanghai Composite Index ending down 1.3 percent after a rocky session.

However, US stocks finally halted its decline on Wednesday. The S&P 500 jumped 3.9 percent to end its six-day slide.

The rebound came as New York Fed Bank President William Dudley said on Wednesday that the market upheaval has reduced the case for raising rates in September.

Still, the market may face more turbulence ahead.

Tom Manning, chief investment officer at Boston Private Wealth, was quoted by Bloomberg as saying: “I don’t know that we found the bottom. I’m not convinced we don’t have more negative days to follow. We’re not likely to go from extreme volatility to extreme calm overnight.”

Wednesday, 26 August 2015

Chinese stocks plunge again, US rebound fails

Market turbulence continued on Tuesday.

Chinese stocks plunged again. The Shanghai Composite Index tumbled 7.6 percent on Tuesday, falling below the 3,000 level for the first time in eight months and extending the decline over the past four days to 22 percent.

In response, China is cutting interest rates. The People's Bank of China announced that it will cut the one-year lending rate by 25 basis points to 4.6 percent effective Wednesday and the one-year deposit rate also by 25 basis points to 1.75 percent. The required reserve ratio will be lowered by 50 basis points.

The move helped boost European stocks. The STOXX Europe 600 jumped 4.2 percent on Tuesday, the biggest gain in four years.

The PBC's move also initially boosted US stocks. The S&P 500 was up 2.9 percent at one point on Tuesday, only for late selling to push the index down 1.4 percent at the close.

Tuesday, 25 August 2015

US stocks in correction, may still “come out OK”

The S&P 500 fell 3.9 percent on Monday.

The decline left it 11 percent below its high in May, putting it in correction territory.

The market did rebound from an early plunge, only to face renewed selling in the afternoon.

Some analysts remain optimistic though.

“As prices go lower, we see selective opportunities to buy as opposed to a provocation to become more bearish,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.

“When the issues are on the table, the market will do what it has to to adjust and come out OK on the other end,” said Laszlo Birinyi, the president of Birinyi Associates.

Indeed, historically, data from Bespoke Investment showed that following a 5 percent decline, the market is on average relatively flat the next week, up 1.65 percent over the next four weeks, and up close to 5 percent over the next 12 weeks.

Monday, 24 August 2015

Stocks face risk of steep losses

After the market turmoil last week, there could be more to come.

Global stocks fell last week, with the MSCI All-Country World Index falling 5.4 percent. Even the usually-resilient United States stock market was not spared, with the Standard & Poor's 500 Index falling 5.8 percent.

This week has started off no better. China, which triggered off the market turmoil by devaluing the renminbi on 11 August, is rocking markets again as the Shanghai Composite Index plunged 8.5 percent on Monday, the most since 2007 and erasing its gains this year.

Indeed, some analysts were expecting more declines even before trading started this week.

In a telephone interview with Bloomberg on Sunday, Doug Ramsey, chief investment officer of Leuthold Weeden Capital Management LLC, said that losses in the S&P 500 could reach 20 percent.

“It’s going to be pretty deep,” Ramsey said.

While the recent maket declines had been triggered by China's currency devaluation, Ramsey had already turned cautious in late 2014 as market breadth weakened and US stocks in October suffered what was at the time the worst rout since 2011. He turned all-out bearish at the start of August after the S&P 500 hit a record high in May but gauges of breadth, transportation stocks, utilities and corporate bonds failed to keep up with it.

John Hussman sees even deeper losses in store for the US stock market. In his latest commentary, he said that “we fully expect the S&P 500 to decline by 40-55% over the completion of the current market cycle”.

While Hussman sees market overvaluation as the primary driver of the extent of the losses over the long term, he, like Ramsey, sees the on-going weakness in market internals as a sign of vulnerability to sharp corrections.

In addition, Hussman noted that on Friday, both the Dow Jones Industrials and Dow Jones Transports jointly broke the initial correction lows that followed their joint bull market highs. According to his interpretation of Dow Theory, this means that “the major trend has turned negative”.

Hussman concluded: “Last week's market loss was initial and quite contained from the standpoint of current valuations. My view is that under the market conditions we presently observe, investors face the continued potential for steep, vertical losses.”

Saturday, 22 August 2015

Markets plunge again

The trading week ended with more turbulence as global stock markets plunged on Friday.

The MSCI All-Country World Index tumbled 2.7 percent to the lowest since October. The S&P 500 plunged 3.2 percent, the most since November 2011. The Stoxx Europe 600 Index lost 3.3 percent.

The MSCI Emerging Markets Index fell 2.2 percent. The Shanghai Composite Index plunged 4.3 percent.

Hong Kong’s Hang Seng Index fell by a relatively sedate 1.3 percent. However, it has declined more than 20 percent from its April high, taking it into a bear market.

In other markets, junk bond yields rose to the highest since October 2012, US Treasuries completed the largest weekly gain in five months, and oil fell below $40 a barrel for the first time since 2009.