Market Comment - August 16

(Marco Bonelli) Is the correction over, how far does the rebound go? Is the rebound over, how far does the correction go?

Did the market move too far too fast to the downside and upside? It is definitely a roller-coaster of the extremes, technically and fundamentally! In one week the Dow Jones gained 8.29% from the lows and caught up about 40% of what the index lost in a bit more than two weeks. On average the major indexes gained between 8 and 12.5% in the past five trading days and recovered between 40 and 45% of the correction.


Yesterday the closing levels from Friday, August 5, just before Standard and Poor's downgraded the US credit rating, was closely watched and in the last hour, all major indexes broke through the respective levels and with that erasing all post-credit-rating losses which is obviously a big psychological event. Apparently this morning the market opens below these levels again while the world is desperately watching a couple of politicians meeting in Paris, hoping they will cheerfully announce a solution to the European debt crisis which will rescue the existence of the Eurozone and economic growth in general. In fact, anything more than an agreement to closer working together would be a surprise unless Germany drops its opposition to the introduction of Euro-Bonds, which by the way will not really solve the debt issue but only sweep it under the fluffy Euro-carpet.

Yesterday's market action was a bit misleading as the bulk of the index performance was carried by a small group of stocks while the broad market participated to a much smaller degree and with that artificially elevating the advanced/decline ratio. IBM, CVX and XOM contributed 36.5% of the Dow's 213.88 move. While IBM gained from an upgrade, energy and basic material stocks benefited from higher commodity prices and were the second and fourth best performer in the SPX. On the flip-side, technology underperformed as only four stocks (NOK, DELL, IBM, AAPL) made up about a 1/3 of the performance of the MSH - Morgan Stanley Technology Index (by the way, DELL reports tonight and HPQ follows on Thursday). Consumer stocks underperformed the most in reaction to higher energy prices, disappointing results from LOW and a late reaction to the disappointing consumer confidence number from Friday.

So let's see, if a much better than expected July industrial production and the highest capacity utilization since August 2008, a statement that Fitch keeps the AAA rating for the US with a stable outlook and a positively perceived announcement out of Paris will turn the mood this morning and even extend the too-far-too-fast rebound rally...

Trade well.


(Marco Bonelli is the Managing Director - International for CL King & Associate in New York. The opinions expressed are his own)