Sunday, May 03, 2009

How To Interpret Market Commentary & Analysis

We all get to read market analysis and commentary on a daily basis. These are information which will help us assess the pulse of the markets. As in anything, the ability to distinguish useless information from critical information is vital in helping us improve on how to read market. Below is the latest market report from AFP, my thinking process in purple.

US stocks find strength

May 2, 2009 - 7:47AM

Wall Street stocks wobbled higher overnight as investors digested mixed economic data and braced for the results next week of "stress tests'' on the US banking system. (This opinion is a broadstroke, and is an opinion not an absolute truth. Commentators will try to interpret the market gyrations by attaching reasons to price movements. Not all price movements have logical valid reasons. Sometimes its really just a random walk on Wall Street. There are one hundred and one reasons why investors sell or buy, but we somehow always need to find a logical daily explanantion for why prices move in a certain manner. I would love it if a commentator actually come out and say "I don't know, its random I guess" because in many cases there are really nothing "market moving", prices go up because there are more buyers than sellers, thats all).

The Dow Jones Industrial Average rose 44.29 points (0.5%) to finish at 8212.41. The tech-heavy Nasdaq composite ticked up 1.90 points (0.1%) to 1719.20 and the broad-market Standard & Poor's 500 index rose 4.71 points (0.5%) to 877.52. (This has more relevance as it looks at sections of the markets that moved differently. This is more useful in ascertaining whether there are pockets of strong interest in certain sectors, size of stocks, etc. When the broader index charged up, its a broad based rally, which means everybody is thinking stocks in general are good and is not even discriminating between actual unique fundamentals particular to certain sectors or stocks. Broad based rally indicate "bull market sentiment", the need to buy stocks just to not be left out. If certain sector indices significantly outperforms broader indices, it show a rerating in specific sectors, and may not indicate a bull market trend but rather a rebalancing of exposure to more favourable sectors. It may means that there are particular developments within a specific sector that caused that.)

Economic reports provided conflicting recovery signals on the sick economy now in its 18th month of recession. The troubled manufacturing sector contracted in April for a 15th consecutive month, the Institute of Supply Management said, but the pace of decline was less severe than most analysts projected. (This is good information as it allows me to benchmark where we are in the recession. The average length of a recession is about 16 months and we have gone past that. It also tells me that its worth looking more closely on possible upturn in sentiment and a willingness to be long in equities. If we were in the tenth or eleventh month of a recession, I would probably not be too eager to look at stock investments in general and go for an extended holiday).

The Commerce Department reported factory orders fell by a seasonally adjusted 0.9% in March, in line with expectations after a surprise February increase that had snapped a six-month decline. "The data is still mixed and far from anything solid. While the common theme here is still a contraction, it keeps feeling like a slower contraction,'' said Jon Ogg at 24/7 Wall Street. (Economic data basically tries to confirm what we know. If the bad data is not as bad, it will not move markets immediately. Economic data and trends are like pouring water into a barrel. You need cumulative data to indicate collectively that a certain trend has appeared, e.g. recovering, or not as bad as anticipated, only then will markets be moved by the data. These bits and pieces of economic data needs to be entered into the C drive of our brain and ingested along with other recent economic data for us to form a picture of trend.)

Investors were on tenterhooks waiting for authorities to announce the results of stress tests on the biggest 19 banks that received public bailouts, now expected next Thursday. "The timing of the release of bank stress tests may be giving the market some jitters,'' said Al Goldman at Wachovia Securities. Bank of America dropped 2.6% to $US8.61, JPMorgan Chase shed 1.5% to $US32.49 and Wells Fargo lost 2% to $US19.61. (I have already posted on the likely impact of "stress test" for banks. On the surface it may be seen as negative for those banks being asked to raise capital - but the imposition of the test and its transparency should bolster confidence in the underlying strength of the banks, and may convince more that the worst for banks is coming to an end).

Citigroup, which is trying to raise capital to pay off $US45 billion ($A62.06 billion) in public aid, fell 2.6% to $US2.97 after announcing a deal to sell its Japanese brokerage Nikko Cordial to Japanese megabank Sumitomo Mitsui which was expected to generate $US2.5 billion ($A3.45 billion) in equity.

Among other stocks in focus, Alcoa added a hefty 6.8% to $US9.69. The aluminum producer said it was to sell to Platinum Equity most of its electricity equipment business, which employs about 17,500 people worldwide, for an undisclosed sum.

The market punished firms with earnings reports including credit card company Mastercard, down 5.7% at $US172.90, and insurer MetLife, off 7.7% at $US27.45.

Car stocks were under pressure after dismal April sales reports and Chrysler's appearance at a bankruptcy court hearing in New York a day after filing for Chapter 11 bankruptcy protection.

General Motors skidded 5.7% to $US1.81 and Ford fell 4.8% to $US5.69.

A strong surge in crude prices lifted oil majors. ExxonMobil leapt 2% to $US68.01 and Chevron rose 1.2% to $US66.87 after reporting a better-than-expected profit plunge in the first quarter.

"The earnings news continues to be somewhere between awful and really bad for most companies, but above expectations, which has given Wall Street a lift over the last month,'' Mr Dickson said. (The many corporate actions and earnings announcement should be kept in our C drive as well. Take note on market leaders, results from second and third liners are not as important. These are important in that earnings NEED NOT be rising for a market to turn. Earnings need only be NOT AS BAD as expected for market sentiment to turn).

April produced powerful gains, pushing the Dow up 7.3%, the Nasdaq a hefty 12.3% and the S&P by 9.4%, marking its best month-on-month rally in more than nine years.

The bond market dipped on Friday. The yield on the 10-year US Treasury bond rose to 3.174% from 3.124% on Thursday and that on the 30-year bond advanced to 4.088% from 4.044%. Yields and prices move in opposite directions.


p/s photo: Son Dam Bi


hishamh said...

Right on.

I always cringe when market commentators say the market moved for this reason or that - most of the time, market moves are within 1 standard deviation of the historical average.

emacro said...

I wrote this analysia using the charts during the weekend: