Fundamentals, US Markets

Stocks Fall for Second Session as Financial Concern Grows

U.S. Session Key Developments

• Commodities Fall as Dollar Recovers
• Downgrades in Financials Lead to Selling Pressure

US equities pared gains to close lower by more than one percent as concerns in the financial sector dismissed optimism elsewhere. Initially, markets traded to within fifty points of a new top on the Dow as risk appetite improved on strong South Korean GDP, higher Asian markets and further dollar weakness. However, as the day wore on, fundamental data proved less optimistic with German confidence falling, while the Chicago Fed’s National Activity Index posted a worse reading for the second consecutive month in September. Adding to concerns were financial stocks, which had been weaker for much of the session as dilution fears in European banks spread to domestic firms. The drop was further stimulated when Richard Bove, an analyst who’s downgrade to Wells Fargo last week caused a small sell off, downgraded several regional banks on concerns they may not see profit until 2011. Overall, markets have dropped for the second consecutive session of trading, while remaining just several percentage points from their peak. In the days ahead it will be important to see whether indices find support at old September highs or whether there will at last be a significant correction following the dramatic rally since July. From a larger picture, there may be further dollar weakness ahead despite the rebound today, as borrowing costs remain lower than that of the Yen. This would bode well for equities while also helping US multi-national firms compete. Also not to be ignored is the immense confidence lingering in markets and the enormity of sidelined liquidity that has, in the past, filled in correctional dips with speedy efficiency.

DJIA 30                 9,867.96                   -104.22                         -1.05%
The Dow closed lower by more than one percent after coming within 50 points of a new 2009 high. All but three stocks declined on the session, while greater than three percent declines in Boeing and JPMorgan led the index. Some upside was noted as Microsoft rose an additional 2.36% on upgrades following its Q3 results that sent shares higher more than five percent on Friday. Overall, despite having dropped nearly three percent from its peak to the lowest level in two weeks, the Dow hovers at approximately its old resistance levels in September. This could provide some support for the index, while given the relatively lower weight of financials in the index; the Dow may outperform the S&P should further downside ensue.

S&P 500                  1066.95                    -12.65                          -1.17%
Trading in the broad 500 member S&P index led to the largest decline of the five majors as all sectors fell while losers outnumbered winners by a ratio of nearly 5-to-1. Financials saw the biggest weakness with a fall of 2.51% as downgrades to regional lenders led to sell-offs of approximately eight percent in smaller firms including Genworth Financial, Fifth Third, and Regions Financial. As the S&P derives a higher weight than the Dow and NASDAQ in the financial sector, further weakness could lead the sector to underperform.

NASDAQ                 2,141.85                  -12.62                      -0.59%
The tech-heavy NASDAQ suffered a minimal decline similar to trading action on Friday, which saw the index posting the smallest loss of the three majors. More than two-thirds of stocks fell, while losses were noted across all sectors. Of the six largest firms listed, all of whom belong to the technology space in one way or another, half posted small declines while Microsoft, Google and Intel advanced. Ultimately the tech sector remains well positioned for recovery with pent up demand likely to aid in demand while the release of Microsoft’s Windows 7 operating system may also lift the sales of many firms in the computing space.

Written by Roman Kadinsky, CFDTrading Research
Please send any comments about this report to Rkadinsky@fxcm.com