Thursday, July 31, 2008

July 2008 Rewind - "Bazooka" Interventionism

This July, the major U.S. equity indices put in a yo-yo performance mirroring volatile energy prices and fresh bank failure fears, later mitigated by significant Federal intervention. The S&P 500, Dow Jones Industrials and NASDAQ 100 cash indices posted mixed results of -0.99%, +0.25% and +0.66%, respectively.

However, these mild month-end results mask the turmoil experienced through the 15th, when the S&P was down some 5% and the VIX (implied options volatility) briefly surpassed 30 points. Fueling fears early on were reports of a potential General Motors bankruptcy, rumours of a Fannie Mae, Freddie Mac or Lehman Brothers failure, and the seizure of IndyMac Bank. Although the thick of earnings reporting season also added to investor anxieties, results largely exceeded expectations. Lastly, inflation measures also came in particularly hot, economic measures continued to be mixed, and Iranian tensions appeared ready to flash higher at any moment.

In that regard, crude oil peaked at record highs exceeding $147 per barrel, only to retreat rapidly to the low $120s on signs of global deceleration. Equally supportive of the ultimate relief rally, Federal agencies made a concerted effort to combat further bank failure fears with Treasury Secretary Paulson's metaphoric "Bazooka," including:
  • Substantial unspecified credit made available to the GSEs;
  • A general extension of Fed Window lending through early 2009;
  • A covered-bond plan proposal;
  • A naked short-sale ban on nineteen Financial stocks; and,
  • Passage of a "mortgage default bailout" bill, initially estimated at $25-plus billion.
In spite of the erratic action in equities, the acquisition market was quite active -- particularly in the Pharma and Biotech spaces. Unlike recent months, Style-Box performance showed relative strength in the Value camp with the nascent recovery in the Financials and Homebuilders leading the reversal. Conversely, Energy and Materials saw sizable losses.

With many pundits calling an intermediate bottom, it will be interesting to see what August's traditionally light summer volume brings traders ahead of the Fall political season.

Sentiment: Highly-Mixed
Volatility: Moderate (VIX 20-30)
Direction: Sideways-Mixed

The Style-Box was calculated using the following PowerShares™ ETFs: Small-Growth (PWT), Small-Value (PWY), Mid-Growth (PWJ), Mid-Value (PWP), Large-Growth (PWB), and Large-Value (PWV). The Sector-Ribbon was calculated using the following Select Sector SPDR™ ETFs: Materials (XLB), Industrials (XLI), Energy (XLE), Staples (XLP), Discretionary (XLY), Financials (XLF), Technology (XLK), and Healthcare (XLV). The Standard & Poors 500, Dow Jones Industrial Average and NASDAQ 100 may be traded through ETF proxies, including the SPY or IVV, DIA and QQQQ, respectively.

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