(Reuters) - Bearish bets in the equity options market, coupled with an increasingly sour view from a technical perspective, suggest stocks will struggle to break from a vicious two-month downtrend this week.
With few catalysts on tap, it could be difficult for investors to find a reason to buy even as recent declines and a jobs report that did not confirm investors' worst fears present the opportunity for a short-term boost.
U.S. markets will be closed on Monday for Independence Day, and the holiday is expected to depress volume during the week, making equities more vulnerable to large swings following the worst week for the S&P 500 in two months.
"Only about 30 percent of stocks are above their 200-day moving averages, so the vast majority are on a downtrend," said Frank Gretz, a market analyst at Shields & Co in New York.
"The market needs to prove itself with a rally on strong volume, and that's going to be hard to get with the holiday and the bad news we've seen creating more pessimism."
Last week, the Dow fell 4.5 percent, the S&P lost 5 percent and the Nasdaq shed 5.9 percent.
Over the past couple of months, markets have been beset with a string of negative data showing weaker-than-expected retail sales, consumer confidence and plunging home sales. The data was capped by Friday's weak payrolls report.
BETTING ON DECLINES
Options activity on exchange-traded funds (ETF) that tracks the S&P 500 benchmark and the Nasdaq suggest that investors are betting on more declines.
"The most actively traded options on the SPDR S&P 500 ETF are the July $100 puts, suggesting traders are hedging for potential losses," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, Ohio. The ETF (SPY.P) slid 0.6 percent to $102.20.
Similar activity was spotted on the PowerShares QQQ Trust ETF (QQQQ.P) which tracks the performance of the Nasdaq 100. The most active trades were on July $41, $40 puts. The ETF closed 0.3 percent lower at $42.47.
"We are in a tremendously oversold situation, but that doesn't mean we can't sell further. Options activity shows that the bears are in control and that the trend will continue," Detrick said.
As of late Friday, 133.94 million shares traded on the SPDR S&P 500 fund, and on Thursday 382.92 million shares exchanged hands, the highest volume since May 21. The three-month average trading volume is 266.34 million shares.
"When the volume is high on a down day like yesterday (Thursday) and (Friday), it confirms that this is a bear market and that the sellers will be in control."
The QQQ Trust ETF traded 46.19 million shares as of late Friday, but the volume reached 158.69 million on Thursday, compared to a three-month moving average of 103.50 million.
The June U.S. nonfarm payrolls report showed a fall in overall employment while private payrolls rose only slightly, a sign the recovery continues to struggle to gain traction.
But some analysts say the market's recent sharp declines and positive elements in Friday's unemployment report could give stocks a short-term boost.
STOCK BOUNCE POSSIBLE
"Investors were worried that the report would show the economy melting down, and clearly that didn't happen," said Charles Lieberman, chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey.
"The psychology was just too negative about the labor market and the economy in general, so we could be due for a bounce."
The S&P's 14-day relative strength index fell below 30 on Friday, indicating it could be oversold in the near-term. The Standard & Poor's 500 Index .SPX fell to 1,022.58 on Friday. The benchmark could find technical support near the 1,008-1,010 level, this year's low and also the 38.2 percent Fibonacci retracement of the advance from the low in early March 2009 to the high in April 2010.
One of the few indicators on tap for this week is June same-store sales, which many retailers will report on Thursday, giving insight into the state of consumer spending.
"Consumers are very cautious right now, and we're not looking for much incremental growth at all," said Thomas Nyheim, portfolio manager at Christiana Bank & Trust Co. in Greenville, Delaware.
Nyheim added that discount retailers could be among the few sectors to see improved sales as consumers "trade down" to lower-priced merchandise.
Discount retailer Family Dollar Stores Inc (FDO.N) is scheduled to report quarterly results on Wednesday, the sole S&P 500 company to report this week. The third-quarter earnings reporting season begins in earnest with Alcoa Inc (AA.N) on July 12.
"Family Dollar has seen some positive trends of late, and they've been picking up market share from other retailers," said John Massey, portfolio manager at SunAmerica Asset Management in Jersey City, New Jersey.
Despite the lack of scheduled reports, a number of companies could give guidance about earnings this week. John Butters, the director of U.S. earnings for Thomson Reuters, said that the week before the start of earnings season "will be the time companies will come out and say, 'This is what we're going to do.'"
As the earnings season nears, Butters noted that there were 1.2 negative company preannouncements for every one positive. Historically, the ratio has been two negatives for each positive.
Also on tap for this week is the Institute of Supply Management's services sector survey for June, which is expected to contract slightly from the previous month but still show expansion.
(Reporting by Ryan Vlastelica and Angela Moon; Additional reporting by Caroline Valetkevitch and Matthew Lynley; Editing by Kenneth Barry and Maureen Bavdek)
(Reuters) - World stock prices fell for the fourth day running on Monday and the dollar traded close to two-month lows on growing concerns of slowdowns in the United States and China -- the two main pillars of global growth.
Trading was expected to be light on Monday because of the U.S. Independence Day holiday.
Data showing the U.S. labor market shrank for the first time this year in June, slower Chinese manufacturing activity and euro zone austerity measures fueled concerns over prospects for the global economy.
"Double-dip (recession) fears are the pervading influence on market psychology at present even as European sovereign (debt) concerns appear to be easing," said Mitul Kotecha, global head of foreign exchange strategy at Credit Agricole CIB in Hong Kong.
World stocks measured by MSCI All-Country World Index .MIWD00000PUS drifted 0.1 percent lower after three consecutive sessions of declines. The index has lost 16 percent since mid-April, and is down 11 percent for the year.
The index carried a one-year forward price-to-earnings ratio of 11.9, a level last seen in April 2009 and well below its 10-year average of 15.42, according to Thomson Reuters DataStream.
By comparison, MSCI emerging equities index .MSCIEF had a one-year forward P/E of 10.76, in line with its 10-year average of 10.8, DataStream showed.
Europe's FTSEurofirst 300 .FTEU3 was flat, with the continent's banks .SX7P dipping 0.1 percent.
French Economy Minister Christine Lagarde said on Saturday that stress test results to be published on July 23 will show that "banks in Europe are solid and healthy."
However, "there is a certain amount of skepticism that the stress tests (on banks) ... will either be fudged or the complete results won't be published. What we need is clarity," said Felicity Smith, fund manager at Bedlam Asset Management.
In Asia, Tokyo's Nikkei average .N225 put on 0.7 percent, while the Shanghai Composite Index .SSEC dropped 0.8 percent.
DOLLAR NEAR 2-MONTH LOW
The dollar .DXY added 0.2 percent against a basket of major currencies, recovering slightly from a near two-month low as traders held back given the U.S. market holiday. The dollar index lost 1.9 percent in the previous two sessions.
The euro paused after last week's boost from unwinding of short and leveraged positions. It slipped 0.3 percent to $1.2529 and dipped 0.3 percent to 109.98 yen.
The shared European currency has lost 12.5 percent against the dollar so far this year, though attention now appears to have turned to concerns of a slowdown in the United States and away from the euro zone's banking and government debt woes.
"The dollar is responding to weak signs in the U.S. economy," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
BNP Paribas said investors can cheaply hedge a cross-asset portfolio against the risk of a double dip in global growth with currencies. In a note, it recommended investors short a basket of 2/3 Australian dollar and 1/3 New Zealand dollar and long a mix of Swiss franc and yen.
Global growth worries also sent German government bond futures 25 ticks higher to 129.56 from Friday's settlement close, and yields on benchmark 10-year Bunds fell 2 basis points to 2.564 percent.
(Additional reporting by Kevin Plumberg in Hong Kong, Charlotte Cooper in Tokyo, and Atul Prakash, Tamawa Desai and George Matlock in London; Graphics by Scott Barber; Editing by Ruth Pitchford)
(Reuters) - The U.S. recovery is underway, but inflation is so low and unemployment is so high that the Federal Reserve's super easy monetary policy is still needed, Chicago Fed President Charles Evans said on Wednesday.
"The recovery is definitely on," Evans said in a rare live appearance on CNBC. But U.S. housing data has "fallen off a cliff" and jobs gains have slowed markedly, he said.
Inflation is underrunning his 2.0 percent guideline for the next three years or more, and the recovery, while not faltering, is slow enough that it will take a number of years before unemployment reaches an acceptable level, he said.
"We are underrunning our dual mandate," he said, referring to the Fed's twofold goal of maintaining price stability and full employment. "I think the policy accommodation is called for."
The Fed cut its target for overnight lending between banks to near zero in December 2008, and on June 23 reiterated its vow to keep rates exceptionally low for "an extended period."
Meanwhile Europe's debt woes pose a risk to U.S. growth, and businesses in the U.S. are still are responding to "replacement demand" rather than the "expansionary demand" needed to boost economic growth. The U.S. economy will likely grow about 3.5 percent this year, he said.
Within the Fed, Evans said, some of the most contentious debates center around the outlook for inflation, with some worried about the prospect of prices rising too fast, and others worried about a slowdown in price increases known as disinflation.
Evans said he himself is concerned about inflation, but only in the long-term.
If there is a need to adjust monetary policy in either direction, he said, "I'll be there."
The Fed's policy-making Federal Open Market Committee next meets in mid-August.
Evans defended the U.S. government's giant fiscal stimulus package last year, saying it was effective in turning around both the economy and the psychology.
Providing more stimulus at this point in the recovery would be "pretty tough" he said.
EURUSD has now fallen over 4.5% in the 2 weeks since the surprise non-farm payrolls, and the exit of USD short positions in the market now looks less like a temporary correction and more like a trend reversal with every passing day. Despite still being in the sweet spot of low US rates against a backdrop of improving global data, the truth is that US data has just been a little bit too good lately. Fed policy makers remain understandably cautious about the outlook for 2010, which is why even subtle alterations to the wording of their statement have significant impacts on market psychology. The acknowledgement yesterday that the decline in the labour market is “abating”, gives markets the first hints that the US is getting back on track sooner than anticipated, and the USD will not settle for its role as carry trade funding currency for long. EURUSD’s collapse through 1.4480 support overnight leaves very little technical support expected until 1.4180 levels, and given the ongoing negative news about Greece’s credit rating and the fragile state of Austria banking system, the fundamental outlook offers little consolation for EURUSD bulls. Another currency suffering today is GBP, after this morning’s reading of UK Retail Sales was starkly lower than consensus forecasts, printing -0.3% MoM, 3.1% YoY (expected: 0.5% MoM, 3.7% YoY). GBPUSD had been trading around 1.6230 levels ahead of the release, but 1.6200 support rapidly gave way to a slump down to 1.6111 lows, and a close below 1.6150 leaves us open now to a revisit of 1.6000. The US economic releases this afternoon are by no means first tier data, with only Leading Indicators and Philadelphia Fed expected; however given the pervading mood of the market to unwind USD shorts, we would expect upside surprises to have a disproportionately large effect on USD pairs.
Today's Key Issues (time in GMT): 12:00 CAD CPI, % m/m (y/y) Nov exp: 0.3 (0.8) prev: -0.1 (0.1) 15:00 USD Philadelphia Fed mfg index Dec exp: 16.0 prev: 16.7 15:00 USD Leading indicators, % m/m Nov exp: 0.7 prev: 0.3
The Risk Today:
EurUsd After failing to climb back above 1.4600 (hitting 1.4590) we saw short term wave 4 come to an end before wave 5 has taken the pair to the major support level at 1.4360. This level is also the lower range of the new downtrend so if short sellers are looking to book some profits pre- weekend / Christmas, then this is a highly likely place for them to do it before undergoing a choppy sideways action higher. IF we drop out of the bottom of the channel then the longer term target of EURUSD 1.3500 will be in play, but for now we advise cutting some EURUSD shorts and waiting for the re-entry, ideally at 1.4684. The prior support at 1.4515 has now become resistance so expect it provide a hurdle in the meantime.
GbpUsd GBPUSD finally looks to have broken out of its one month bearish channel, as Retail Sales data quickly prompted a collapse through 1.6200 levels to breach the lower end of the channel at 1.6166. A close below 1.6166 opens up a move towards 1.6000-1.6040 area, and for now, good supply at 1.6200 should cap any rallies.
UsdJpy The pair has continued on its 3-week uptrend since bottoming at 84.81 in 27th Nov, topping at 90.26 in early Asian trading today. Long positions are still favored with bids coming in at 89.50, and resistance at 90.86 (coinciding with 9 month downtrend line) plus resistance at 91.80.
UsdChf On Tuesday we said that we were probably still in wave 3 of 5 and that 1.0360 would attract longs in the short term. That scenario has played out perfectly, confirming the wave counts, and tells us that we are now likely in wave 5 of 5 and accompanied by some increasingly divergent momentum indicators. Wave 5’s can be a great place to make some big bucks and fast – our October gold trade from 1006 to 1188 is a typical example – but in this case the divergences are a concern for me and I would now wait for a meaningful correction of this entire 5 wave move.
Trading psychology is ‘something’ that a trader creates from existing personality traits that are not initially related to trading. Trading psychology has become so widely discussed and promoted through books and consultants that it has become a very convenient rationalization and excuse for losing. Trading is much more of a psychological problem then a methodological one, only the traders who have first accepted this have a chance of being consistently successful traders. Trading psychology can affect your judgment while you are trading.
