The Overnight Report: One Trick Pony

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By Greg Peel

The Dow closed up 160 points or 0.7% while the S&P gained 0.1% to 2561 and the Nasdaq was flat.

New Resistance

I suggested yesterday we might see some selling in the local market, following an eight-day unbroken run, triggered by falls in commodity prices that had helped to support said rally with their own recent strength. I was only partially right.

The computers ignored the futures call and sent the ASX200 to exactly 5900 on the opening rotation. From there it fell back back ten points before the troops reassembled and another attempt took us to 5906 by lunchtime. But again the sellers moved in and a slow drift took us back to where we started by the close.

Clearly there is resistance at the new big figure. We will presumably now either consolidate around that level or fall back towards the breakout level before 6000 can be spoken of once more, if that is to be the goal.

Despite said commodity price falls, the materials sector closed slightly higher. As is typical in a consolidation period, there was none of the sector uniformity that has been the highlight of the run from the bottom. A lot of yesterday’s action came down to individual stock stories.

Telstra ((TLS)) was back to its old habits, leading telcos down -1.7%. Consumer discretionary fell -0.9%, helped by allegations Crown Resorts ((CWN)) throws loaded dice. Materials, energy, industrials and consumer staples were all as good as flat. The banks managed a 0.2% gain. It was left to utilities (+1.4%), thanks to the government’s new energy policy being a positive for AGL Energy ((AGL)), and healthcare (+1.2%), thanks to an upbeat update at the CSL ((CSL)) AGM, to balance the books.

Train crash of the day was property developer heavyweight Lend Lease ((LLC)), which fell over -10% after revealing its Australian construction business was not running quite as hot as everyone had assumed. The stock has run up over 30% recently, so it didn’t take much to tip it over.

Looking at today’s session, commodity prices have pretty much cancelled each other out overnight and the futures are suggesting -2, which seems strange given the Dow has just run screaming through a new milestone. However…

Big Blue

As far as conquering new milestones goes, last night’s solid break through 23,000 for the Dow was met with the least fanfare. Sure, there were caps handed out, but the mood was one of ambivalence.

After 22 consecutive quarters of declining revenues, Wall Street had pretty much written off Big Tech dinosaur IBM. The company may once have been the biggest on Wall Street, but its days of glory were long gone, it was assumed. That’s why a surprisingly good earnings result from the company last night, suggesting IBM cannot be written off just yet, sparked a 9% rally for the stock. Relative to the New Tech cohort, IBM had been trading at a steep discount.

IBM’s share price move, its biggest since 2009, was worth around 100 Dow points. The broad market, on the other hand, managed only a 0.1% gain, and there was an even number of stocks down on the day as up. The Nasdaq was also flat. In other words, it was a flat session on Wall Street.

That’s why the 23k milestone meant little. It’s just a number, represented by a misleading price-weighted average created over a century ago. To put the Dow into perspective in an Australian market analogy, the fact that Rio trades at twice the price of BHP means Rio would have twice the influence in a “Dow” as BHP. The fact CBA trades at twice the price as the other big three banks means it, too, would enjoy double-dominance. But such an average completely distorts what is otherwise similar the market caps of Rio and BHP and CBA and Westpac.

The Dow milestone is only serving to make Wall Street a little cautious. The earnings reports to date have been good, and earnings are “real”, unlike faith in a government policy that may or may not come to be, but the successive milestones only remind traders, mostly older ones, of what I mentioned yesterday – the Dow did the same thing at exactly this time thirty years ago.

And just to mark tomorrow’s anniversary, Citi put out a paper suggesting Wall Street is set to fall -25%, as it did in 1987.

The standard response to such calls, as has been the case for the past couple of years at least, is “But what could tip this market over?” Leaving North Korea out of it for the moment, the answer is nothing has to. There was no specific trigger for either the crash of ’29, ’87 or the Tech Wreck of 2000. The market simply ran too far, and one day someone decided to sell.

But what of 2008? I hear you think. 2008 was not a “crash” per se. There was no single one-day rout. Rather the GFC and subsequent 50% de-rating of Wall Street came about in comparative slow motion. Realistically it began in mid-2007, when investment banks found they could not find buyers for their CDOs. The correction was well underway when Lehman went down in 2008. It took the Fed’s QE1 to save the day in 2009.

I am not making a prediction here, just an observation. To date, Wall Street has been unable to undertake a healthy pullback because of TINA. There is simply nowhere else to put one’s money. Citi’s argument, however, is based on the belief QE, which has ensured historically low interest rates, is what has driven Wall Street to ever new record highs. The Fed will begin to reverse that trade this year. So thus it should follow…

Commodities

All base metal prices moved around 1% last night – aluminium, copper and nickel down and lead and zinc up.

Iron ore was unchanged at US$61.70/t.

West Texas crude is steady at US$51.99/bbl.

Gold is down another -US$5.20 at US$1280.40/oz despite the US dollar index being down -0.1% at 93.41.

The Aussie is steady at US$0.7847.

Today

The SPI Overnight closed down -2 points.

One event that could prove market-moving is today’s release of China’s September quarter GDP result. Monthly industrial production, retail sales and fixed asset investment numbers are also due.

Locally we’ll see the September jobs numbers.

A big day for resource sector production reports sees all of Iluka ((ILU)), Northern Star ((NST)), South32 ((S32)), Santos ((STO)) and Woodside ((WPL)) in the frame.

Healthscope ((HSO)), one of the most shorted stocks on the market, holds its AGM.

Rudi will make the trip to Macquarie Park's Sky Business studio twice today. First he'll appear from 1-2pm, later he'll be interviewed on Switzer TV, 7-8pm.

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The Australian share market over the past thirty days…

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