The equity rally on Wall Street backed off from four month highs after the cost of insuring open trades via option puts reached extreme levels, and signaled that the market may just need to take off a little steam. The S&P gave back 1.5% of the 35% gains made since March 2009, but held in the very tight range set over the last few sessions of trade. The financial sector once again was the catalyst for moves, and in trade on Monday it was moves lower that reflected the fair value in U.S. based banks extracting themselves from the tarp funds, and stress test re-alignment.
The rally that added 5% in value to the S&P last week was earnings driven, and has now pushed earnings valuations through year-end price targets. The ratios now need to be adjusted higher, or the market needs to reverse tack to get things aligned; one or the other, and as Monday showed, in the current environment the path of least resistance is lower for the general market at the start of the week. The tech laden NASDAQ however was easily holding positive ground after some positive earnings valuations.
By 15:00 EDT the NYSE had posted loses that averaged 1.5%. The DOW traded at 8465 after a loss of 110 points (1.3%), while the S&P traded at 916, lower by 1.3%, and the technology-heavy NASDAQ traded higher, at the 1745 area, after moving down by 43 points (2.4%).
Following the negative close in the Asian session, European markets opened lower. Since the Sunday session started, the U.S. futures traded negative, with the S&P declining 1.0% so far.
In Europe, the equity markets opened lower after hitting four months high on Friday. Similarly, Asian markets declined tonight falling from a seven month high; however, the downside movement was limited. Commodity producers pulled European markets lower, even though they posted gains in the early Asian session. Commodity producers moved lower along with crude oil and other raw materials, as the S&P futures declined, influencing the overnight markets.
The European markets were lower in trade on Monday, and unable to spark any positive momentum. The German Dax closed at 4866 (-0.9%), the London FTSE closed at 4445(-0.6%), and the French Cac 40 stood at 3248(-1.4%).
Overnight, the Japanese Nikkei declined 9.63 points (0.10%) to 9,423.20. The Australian S&P/Asx slipped 15.90 points (0.40%) to 3,925.80.
In trade on Thursday the XLF, the financial sector ETF, dropped 0.36 points (2.8%) to trade at 12.12, and reversed a very positive period of trade, ahead of the Stress Test results from the U.S. banking sector. It moved lower on huge volume; 275m ETF's changed hands, above the ten day average of 175m. Without a solid period of trade from the banking sector the main equity markets are going to struggle to hold the higher ground, and although lower in trade on Thursday recent moves have increased the Financial Sector value dramatically from the test of $6 in March.