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June 27, 2006

What EOQ Rally?

What started as a seemingly calm morning turned into a route that sunk deep into midday, then drifted lower all the way to the end of the session. By the time the closing bell rung, the S&P 500 was worse by 1% while the tech-heavy Nasdaq 100 lost 2%. Given the big reversal in metals and weakness in financial stocks, I would guess today's slough reflects continued jitters over what the FOMC may present to us on Thursday, and for a change, I think the crowd is right. The Fed is unlikely to ease its language in this meeting.

Nevertheless, I had anticipated an end-of-quarter rally or at least a stalemate as markets awaited the Fed. To see such a sell-off at this moment can be interpreted as a sign of deeper weakness in the market, so I started rebuilding some short positions. Perhaps today's move will prove to be a head fake that drew me in prematurely, but if so, I think the potential damage is limited unless the Fed pulls a fast one and doesn't raise the Fed Funds rate. Such a move would be devastating to their credibility, though, so I perceive the risk as very small.

General Motors announced a brief return of its zero-rate financing promotion, and the news was interpreted by traders as a potential sign of troubled sales. GM's shares were dumped to the tune of 7%, lending no help to the mood on the street. All the folks who were buying these shares over the last two months thinking a turnaround was in the works are going to be disappointed.

One of the hardest hit sectors in today session was semiconductors. As measured by the SOX, the semis gave up nearly 4% and closed at a new low for the year. This sector's weakness has been one of the telltale signs of the overall prospects for the market, so seeing the group hit new lows strongly suggests new lows for the major indices are right around the corner.

There were no big surprises in the existing home sales report, but the fact that sales didn't fall off a cliff may have lent a hand to today's market troubles. Presumably, if housing isn't collapsing, the Fed has room for more hikes. Nevermind the flip side in which housing does collapse and takes everything down with it. As I wrote in a post a couple weeks ago, we may now be in a period where all news is bad news.

Disclosure: Short GM


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