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Equity Markets Attempt Comeback but Finish Lower

James Hyerczyk from ForexHound.com at 10/18/09


U.S. equity markets posted a strong recovery late in the trading session following a sharply lower market in the morning, but still managed to finish lower for the day.  The early session break was triggered by Bank of America which reported a huge loss.  Further weakness was fueled by worse than expected earnings report from General Electric.


Once again traders are questioning valuation in the stock market and wondering if the current lofty levels are justified.  Clearly bullish earnings numbers seem to be already priced in, so next week companies are going to have to wow investors with their numbers or this market will turn south in a hurry.


Treasury futures benefitted from the weaker equity markets on Friday.  All week yields had been rising but today investors took advantage of those higher yields when they reallocated funds from equity markets to fixed income markets.  December Treasury futures finished its 50% retracement of the recent rally and are now in a position to rally further.  More downside pressure in the equity markets is needed to launch the Treasuries higher.


The U.S. Dollar finished the week with an upbeat tone.  Diminished demand for higher yielding assets helped to boost the Dollar on Friday, buoyed by weakness in U.S. equity markets.  Many currency markets have risen to lofty levels which has attracted the attention of the central bankers.  Some markets including the Euro have risen in spite of weak data from the Euro Zone.  Indications are the Japanese are supporting a stronger Dollar.  The December British Pound was the big winner for the week. Speculators drove the Pound higher in anticipation of the Bank of England ending its asset buyback program.


December Gold diverged from the Dollar earlier in the week.  This action led to downside pressure the latter half of the week.  The top in gold could be a sign that prices are too high or that the Dollar is getting ready to mount a strong rally.  The short-term chart indicates this market attempted to form a secondary lower top today.  If successful, then look for the start of another break to the downside.  The first downside target is $1028.80.


December Crude Oil finished the week at a multi-month high.  The trade this week was driven by better than expected supply and demand data.  Breaking through key resistance at $75.00 also gave the longs some comfort.  A stronger Dollar and weaker equity markets could help to limit gains, but as long as the supply and demand picture continues to improve then look for higher markets.  Gasoline price are expected to rise.  This means another “tax” on consumers.  Traders have to be careful not to take this market too high, too fast or it could set itself up for another round of weaker demand. 

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