Fundamentals, US Markets

Stocks Close Lower Following Weak Morning Indicators

U.S. Session Key Developments

•    Asia/Europe Contributes to Risk Appetite
•    Commodities Higher as Dollar Falls

US equities closed lower today following weak indicators on housing and inflation. Early on, futures had pinpointed the major indices for further upside as stocks in Europe had traded higher, but this tilted quickly on event releases at 08:30 EST. Data on housing starts showed a significant fall in October as builders pared back expansion while expecting the new homebuyer tax credit to be concluded in November. Also released was the monthly consumer price index, which showed core prices rising faster than expected to 1.7% from 1.5% in September. Further upside will affect speculation on the Fed’s policy actions and may lead to a quicker-than-expected increase in the target for the Federal Funds rate. In other markets, commodities managed to sustain gains as weekly inventories of crude and gasoline declined. Meanwhile, the greenback recovered across most of its major crosses, losing out mainly to the Swiss Franc and Euro. Ultimately, despite a strong showing in the early part of the week, stocks have now treaded into dangerous territory with the early appearance of a possible top forming. The S&P500 best shows this as a candlestick chart of the index indicates a hanging man and doji in the past two trading sessions. At the same time, one shouldn’t look to this as a clear sign of downside ahead. Fundamental indicators have overall continued to improve, while corrections in equities have, since July, been notably short and brief as sidelined liquidity buys opportunistically into gaps built by selling pressure. Regarding the overall situation, movement in the dollar continues to play a major role in trading. So long as the Federal Reserve continues to maintain its dovish tone on monetary policy, despite purportedly claiming to favor a strong dollar, further weakness appears imminent for the greenback and consequently equity gains could continue into the year-end.

DJIA 30                      10,426.31                   -11.11               -0.11%
The Dow fell from a fresh high yesterday as the index closed within 0.04 points of its open. Despite this potential warning sign, the index has rallied sharply this week with gains already at more than 1.5% in the first three sessions of trading. Overall, more than half of the 30 stocks tracked closed higher along with five of nine sectors. Health Care and Financials rose the most, while Industrials saw a drop of 1.09%. Leading gains today was a 3.68% gain in Bank of America, following Moody’s credit-rating upgrades and a circulated report from hedge fund manager John Paulson, who bullishly expects the stock to double by the end of 2012.

S&P 500                    1,109.80                   -0.52                 -0.05%
The broader S&P500 index closed lower fractionally as a 0.84% rise in Financials helped pare losses in seven of ten sectors. Major movers included greater than ten percent upside in chipmaker AMD and financial services firm MBIA. Of the ten largest firms traded, seven closed higher while moves in all ten were of less than one percent in either direction. Caution seems to be seeping into markets following the rapidity of the recent advance off the early November bottom.

NASDAQ                         2,193.14                    -10.64             -0.48%
Trading in the tech-heavy NASDAQ led to the largest loss of the five majors, while the index remains the most dominant since the start of the year with a gain of more than 39%. All sectors fell with minor losses, with the exception of a 0.24% increase in Financials, while nearly 60% of stocks closed lower. Ultimately, activity in the ten largest firms led to only Microsoft trading higher, while telecom giants Vodafone and America Movil both fell more than two percent. While the tech sector’s weighting should keep the NASDAQ as a safer play given the strength in the balance sheets of firms such as Microsoft, the index’s overall outperformance comes priced with more speculation than its broader counterparts.

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