Wednesday, October 28, 2009

Fear of the Unknown GDP

There were some good reasons to get out of the market on Wednesday, but one of them was probably not fear of the nation's 3rd quarter GDP coming in at a level lower than expectations.

In the first case, nobody is really sure what the expectations really are, since there are estimates all over the place from a variety of sources, most of them in the 2.5-3.2% range of growth and that's likely where it's going to land. Early in the day, Goldman Sachs lowered their forecast for tomorrow's release, from 3.0% to 2.7%. It will be interesting to see whether Goldman's one-day crystal ball is effective or whether it was some kind of sly ruse to get people to sell on supposed weakness.

In any case, a positive number will no doubt be reported by the government, and that number will be revised twice before being finalized, but it is a very important figure. If the number turns out to be better-than-expected, the market will almost certainly gap up, making everybody who sold in order to get out of the way of the number - released at 8:30 am - look silly. Of course, if it's weak, those same people will appear brilliant.

It's a crap shoot, one way or the other.

In any case, stocks took severe declines into the close on Wednesday, fear of the GDP being the only plausible reason. Earnings for most stocks have been very good this quarter, but the market continues to sell off. A solid GDP reading on Thursday could change all of that. Durable goods orders came in at 1.0%, about what was expected, so that figure was a non-event this morning.

Dow 9,762.69, -119.48 (1.21%)
NASDAQ 2,059.61, -56.48 (2.67%)
S&P 500 1,042.63, -20.78 (1.95%)
NYSE Composite 6,765.69, -166.35 (2.40%)

Some very interesting data came out today from the simplest of simple indicators. Declining issues blasted advancers, 5676-891, a better than 6-1 ratio, and new lows actually outdid new highs, by a score of 94-73. Both of these numbers are more indicative of a market bottom rather than the continuation of a week-long decline, but there are other indicators and the overhang of tomorrow's GDP number with which to deal. Both the S&P and NASDAQ broke through their 50-day moving averages today, key support levels which normally should not be violated.

Volume was elevated today, indicating, again, more of a flushing action than middle-move reactions.

NYSE Volume 7,564,809,500
NASDAQ Volume 2,794,432,000

Of course, much of the selling was the result of a stronger dollar, which is traditionally good for stocks, but, now that so many US corporations do business around the globe, a stronger greenback may not be an advantage in terms of repatriating profits and denominating them in US dollars. Then again, costs will be lowered for labor in foreign countries, so, in a way, it's a wash for many companies.

What it's not a wash for is commodities. With the dollar up nicely again today, oil was lower by $2.09, to $77.46. Gold fell another $4.90, to $1,030.50, and silver dropped 30 cents, to $16.24. If the dollar move continues - and there are plenty of reasons why it should - over the short term (longer term, it's weaker), expect commodities and commodity-related companies and products to price lower. Once again, the ugly head of the severe contraction in credit is inducing a degree of deflation with which nobody wants to deal. However, it's there and it doesn't have to be a game-ender. Lower prices, after all, are good for consumers.

In any case, tomorrow's release of 3rd quarter GDP will be either a boon or a bane for the markets. I'll take a flyer and make a call, especially since Goldman Sachs decided to change their mind so close to the release. At least mine won't move any markets, unless you're foolish enough to trade after hours on my recommendation.

My call is 3rd quarter GDP comes in at +3.2%.

1 comment:

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