Tuesday, August 11, 2009

Profit Taking In Financial Stocks Weighs On Market

The market is lower today, despite some solid economic reports. A well known bank analyst (Dick Bove) said to take profits, and that sparked a big selloff in bank stocks. The bank etf (XLF) is down -3.5% currently. The consumer staples sector (XLP) is the only sector in positive territory this morning.

Q2 productivity came in well above expectations at 6.4%, this highest reading in six years. Also, unit labor costs fell -5.8%, one of the biggest declines on record. These are very positive readings for continued low inflation, and may have added to the pressure in commodity-related stocks.

The dollar is a bit higher again, which is also helping weigh on commodities. Oil and gold are both lower, while energy and material stocks are down across the board.

The FOMC starts its 2-day meeting today, with its announcement tomorrow. No one expects any big surprises. There is some talk that the Fed will extend its bond purchase program, but that would be a bit of a surprise.

Bond yields are lower today, with the 10-year yield down to 3.70%. The Treasury has a $37 billion 3-year auction today, which could add to volatility in bonds.

Asian markets rose overnight, while Europe was lower this morning. The WSJ said that housing sentiment in the UK reached its highest level in two years.

The VIX is +7.4% higher today, rising to 26.84. It is still trading below its 50-day average. I think it will be interesting to see if it breaks above this resistance that has been in place since March.

Trading comment: So here we are again. The markets are pulling back for a second day, and everyone is calling for a deeper pullback. It will be interesting to see how the investor surveys come in, as those have started to show a hint more bullishness recently. If they flip back to the bearish side of the ledger quickly, that will increase the odds that any pullback will again be shallow. But if pessimism doesn't surface, that would be a change from recent months and could present a bit more of a problem.


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