I wasn’t too surprised that we were down today given last week’s huge rally. Some people were just locking in big profits and re-positioning for the week. Everything that led the market higher the last two weeks was down significantly today – retailers, homebuilders, and financials. As I said last Thursday, I feel these sectors are still a little over-bought and there is just too much negative news out there to continue the rally.
In economic news, the “factory orders” data showed an increase of 2.3% for December compared to a 1.7% gain in November. This is good news, however we are over a month past this data and the markets did not react to it.
The main catalyst driving the market down was a flurry of downgrades to the major financial companies. Wachovia and Wells Fargo were downgraded by Merrill Lynch and American Express, Capitol One, and Discover were all downgraded by UBS. Here is a great Bloomberg.com article summarizing the downgrades and also giving further insight into the homebuilders and mortgage/bond insurers. Also, there was a rumor that some private equity (PE) firms would help the bond insurers (Ambac and MBIA) – another reason they rallied last week, but an article published by the Financial Times said the PE firms would not supply any capital to these companies. Financials were the biggest losers on the day.
In earnings news, Yum! Brands and Clorox both beat earnings.
The negativity that disappeared the last two weeks has come back. It was always present; it was just the Fed rate cuts made so many people optimistic (almost too optimistic). I don’t like the feel of the market and I unless we get strong economic or earnings data, I see the trend continuing downward.
Tomorrow’s important data includes the Institute for Supply Management's January report on the service sector. The service sector accounts for just over two-thirds of the economy. This number is for January, so it will definitely move the markets because it is much more recent than the factory orders number. Big names reporting tomorrow include NLY, BHP, CME, NYX, DIS, and WHR.
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