MarketView for October 1

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MarketView for Monday, October 1  
 

 

 

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Friday, October 1, 2010

 

 

Dow Jones Industrial Average

10,829.68

p

+41.63

+0.39%

Dow Jones Transportation Average

4,509.08

p

-13.24

-0.29%

Dow Jones Utilities Average

400.37

p

+2.14

+0.54%

NASDAQ Composite

2,370.75

p

+2.13

+0.09%

S&P 500

1,146.24

p

+5.04

+0.44%

 

 

Summary

 

Wall Street kicked off the first day of a new quarter on Friday with some solid gains, led by resource stocks after data in China showed a pick-up in manufacturing activity. Copper hit a two-year high, gold saw another record and oil moved above $80 per barrel. Occidental Petroleum closed up 3.2 percent to $80.77. However, the day’s activity felt the effects of data indicating that factory activity had slowed a bit. Also of concern was the fact that Friday's gains took place with volume on the low side.

 

For the week, the Dow Jones industrial average was down 0.3 percent, the S&P 500 took a hit of 0.2 percent and the Nasdaq was down 0.4 percent. The S&P 500 reached a key resistance level after reaching 1,150.30 before losing ground. That level is viewed as the top of a recent range after stocks surged during September.

 

The third quarter was the best in a year with fears over a double-dip recession fading on improved data and on expectations the Fed will inject more money into the economy. The S&P 500 gained 10.7 percent in the July-to-September period.

 

Meanwhile, options traders seemed to be pricing in higher volatility for the near-term. The CBOE Volatility Index .VIX or VIX, Wall Street's so-called fear gauge, fell 5.1 percent to 22.50. Yet both the VIX and the CBOE Nasdaq Volatility Index .VXN closed higher for four sessions out of five.

 

Technology shares ranked among the laggards on profit taking the day after indexes wrapped up the best quarter in a year. Amazon.com ended the day down 2.1 percent at $153.71.

 

In corporate news, Hewlett-Packard fell 3.1 percent to $40.77 after the company named former SAP CEO Leo Apotheker as its new CEO and president.

 

Bank of America-Merrill Lynch downgraded Caterpillar to "neutral" from "buy," writing that after a recent run-up in the shares, it saw limited upside. Caterpillar ended the day down 0.6 percent to close at $78.22.

 

Market regulators issued a report stating that a massive sale of futures contracts by Waddell & Reed exacerbated the market's rapid decline on May 6, in what has become known as the "flash crash.

 

Crash Caused by a Single Trade

 

A $4.1 billion computer-driven sale by a single trader set off the May flash crash that resulted in liquidity shocks ricocheting between the futures and equity markets, according to a report released on Friday.

 

The report by the SEC and the Commodity Futures Trading Commission did not name the trader. However, it became evident that Waddell & Reed Financial was the party making the trade.

 

The long-awaited report focused on the relationship between two hugely popular securities -- E-Mini Standard & Poor's 500 futures and S&P 500 "SPDR" exchange-traded funds -- and detailed how high-frequency algorithmic trading can rapidly reduce liquidity sending the markets plummeting downward.

 

"The interaction between automated execution programs and algorithmic trading strategies can quickly erode liquidity and result in disorderly markets," the report said.

 

The "flash crash" sent the Dow Jones industrial average plunging some 700 points in minutes on May 6, exposing flaws in the electronic marketplace dominated by high-speed trading. The Dow was down nearly 1,000 points at its lowest point on that day.

 

Although the report did not make any recommendations, it lays the foundation for a special commission to propose new rules to avoid a repetition.

 

Trading was turbulent that afternoon because of concerns over the European debt crisis. Against that backdrop, a "large fundamental trader" initiated a sell program to sell 75,000 E-Mini contracts as a hedge to an existing equity position, according to the 104-page report.

 

Apparently, on May 14, Waddell sold a large order of E-Minis during the market plunge, identifying the firm to which the chairman of the Commodity Futures Trading Commission. The CFTC did not name Waddell in Friday's report because of laws that allow it to withhold such information.

 

Waddell's selling algorithm had "no regard to price or time," the report said. That, coupled with the "aggressive" reaction by high-frequency traders hedging their positions, led to two separate "liquidity crises" -- one in the E-minis, the other among individual stocks.

 

Waddell's algorithm "responded to the increased volume by increasing the rate at which it was feeding the orders into the market, even though orders that it already had sent to the market were arguably not yet fully absorbed by fundamental buyers or cross-market arbitrageurs," the report said.

 

These arbitrageurs transferred the selling pressure to the stock market, sparking a "hot-potato" effect among high-frequency traders that rapidly passed the same positions back and forth.

 

The stock market, the report continued, began plunging as trading pauses kicked in at individual firms, as high-frequency traders became net sellers, and as market makers began routing "most, if not all," retail orders to the public markets -- a flood of unusual selling pressure that sucked up more dwindling liquidity.

 

The unprecedented flash crash called into question many of the regulatory and technological changes over the last decade, which ushered in an era of lightning-quick trading on dozens of mostly electronic exchanges and alternative venues.

 

Data to the beginning of this month show that funds have exited mutual funds in every week since early May and the 20-day moving average of the S&P 500's daily volume shows a slow decline since late May.

 

The flash crash report comes just as the SEC and the CFTC have begun drafting nearly 200 rules required by the landmark U.S. Wall Street reform legislation, which includes a revamp of the opaque over-the-counter derivatives market.

 

More Fed Easing May Be On The Way

 

Manufacturing growth slowed last month and inflation remained subdued in August, leaving the door open for the Federal Reserve implement another round of monetary policy easing. Data on Friday also showed both consumer and construction spending rose more than expected in August, but investment in private projects fell to its lowest level in more than 12 years, Taken together, the data implied economic activity rose modestly in the third quarter after growth slowed to a 1.7 percent annual pace between April and June.

 

Fed policymakers on Friday said more action would likely be needed if the recovery stays weak. New York Fed President William Dudley said high unemployment and low inflation were "unacceptable," adding that more action was probably warranted if the economic outlook didn't improve. Chicago Fed President Charles Evans said more easing was desirable. Other Fed officials are doubtful over whether more easing is needed.

 

Treasury prices were down after the data and Fed official comments, and the dollar hit a six-month low against the euro.

 

The pace of manufacturing growth has slowed in recent months; in September, the Institute for Supply Management's index slipped to 54.4 from 56.3 and employment in the sector also fell. New orders also slowed for a fourth straight month.

 

Meanwhile, the Commerce Department said consumer spending, which accounts for about 70 percent of economic activity, increased 0.4 percent after rising by the same margin in July. At the same time, the Fed's preferred measure of consumer inflation -- the personal consumption expenditures price index, excluding food and energy -- rose only 0.1 percent for a fourth straight month. In the 12 months through August, the core PCE index increased 1.4 percent for the third consecutive month.

 

The Fed warned last week that underlying inflation was below levels policymakers viewed as consistent with the Fed's mandate of full employment and price stability. Holding back consumer spending are a 9.6 percent unemployment rate and shrinking household wealth as the economy struggles to recover from the worst recession since the Great Depression.

 

Spending adjusted for inflation rose 0.2 percent in August, after a similar gain in July. The fourth straight month of gains offered hope that consumers continued to prop up economic growth in the third quarter. With spending a touch below the 0.5 percent rise in disposable income, the saving rate edged up to 5.8 percent from 5.7 percent in July. Savings rose to an annual rate of $661.9 billion.

 

Overall consumer sentiment also improved a bit in September, with the Thomson Reuters/University of Michigan index's final reading rising to 68.2 from 66.6 earlier in the month.