S+P 500 Poised to Fall

Posted on | June 26, 2009 |

US equity markets opened lower this afternoon, as last night’s brief rally offered investors an opportunity to lock in gains.

As a matter of fact, JPMorgan Chase today said the uninterrupted rise in the S&P 500 since its March lows has left the index vulnerable to a sell-off. The bank predicted that the index is likely to fall between 830 and 875 in the months ahead, but at the same time urged investors to use any such move as an opportunity to build positions in cyclical stocks. The broker also upgraded the industrial and materials sector from ‘neutral’ to ‘overweight’, anticipating that cyclical stocks will continue to outperform. [1]

Similarly, I have a report in the pipeline which predicts that the S&P 500 is likely to fall as low as 800. Unlike JPMorgan Chase, however, I believe that defensives may outperform cyclical sectors during the next ‘potential’ phase of consolidation, as their earnings are likely to be more resilient to ongoing recessionary strains and because the shift from defensives to cyclical shares back in March has left the former appearing fundamentally attractive. Earlier this month, on 3 June, Citigroup stated that it believed that tobacco shares, which are considered to be defensive, were looking cheap. [2]

By 3.30pm (London time), the Dow Jones Industrial Average had fallen 25.1 points (-0.30%) to 8447.3, while the S&P 500 had declined 2.6 points (-0.28%) to 917.66. The Nasdaq, meanwhile, had bucked the trend, rising 1.05 points (+0.07%) to 1476.87 – although subdued sentiment is likely to exert pressure on the technology based index later on in the day as well.

Also see S&P 500 Spread Betting.

The People’s Bank of China, which urged the IMF to move toward an international reserve currency in order to reduce its dependency on the US dollar, may have also created some apprehension in US equity markets this afternoon.

Some of the sectors to suffer from risk aversion were banks, miners, and energy companies. Shares in Citigroup were seen down by 0.7% to $3.01, Wells Fargo declined 0.7% to $23.64 and JPMorgan Chase traded 0.2% lower at $34.06. Newmont mining, meanwhile, slid 0.65% to $42.8 while oil services firm Schlumberger lost 0.4% to $55.15. Energy producers Chevron and Exxon traded in the red, down 0.8% at $66.33 and 0.5% lower at $69.56 respectively.

The Boeing Company was also in negative terrain this afternoon, down 0.7% to $42.25 after Qantas, an Australian airline, deferred orders for 30 of the company’s Dreamliner jets.

Micron Technology, a computer memory chip manufacturer, slid 3.4% to $5.12 after delivering disappointing results. The company today reported a third-quarter loss equivalent to 36 cents a share on revenues of $1.11 billion – this represents a 26% decline in revenues and is the tenth straight quarterly loss. Its rival, Intel, had initially weakened on the announcement, but later garnered some support and managed to rise 0.5% to $16.39.

In contrast, shares in Palm Inc, a maker of mobile phone products, soared 13.7% to $15.94 a share after reporting a smaller loss than anticipated. Excluding one-off items Palm produced a loss of 40 cents a share, which beat Reuters’ expectations for a loss of 65 cents a share. Revenues declined 71% to $86.8 million, also beating expectations of $80.3 million.

The maker of the new Pre Smartphone, which rivals iPhone and Blackberry, today said that demand for its new phone had outstripped their expectations and that the company could turn cash-flow positive by the second-half of fiscal 2010.

On the macro front, data released today revealed that consumer spending rose in line with expectations for May, while personal income climbed more than anticipated. Spending, which accounts for over 70% of US GDP, increased 0.3% in May following an upwardly revised flat reading the month before, while personal income rose 1.4% following a revised 0.7% increase in April.

[1] Source: Reuters News (26 June 2009)
[2] Source: Sharecast (3 June 2009)

By Anthony Grech, Research Analyst, IG Index.

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