Alia McMullen, Financial Post Published: Monday, October 26, 2009
Volatility came back to haunt North American equity markets Monday, sending stocks tumbling after an early morning surge as investors, who have been dithering over further gains for days, took confusion over the U.S. homebuyer tax credit as excuse to sell and lock in profits.
"We've seen a market in the past two weeks that's been losing momentum, losing steam and pretty much finding any excuse to take some profits," said Vincent Delisle, the director of portfolio strategy at Scotia Capital. "Even tough earnings seasons have been far better than expectations, the market hasn't been able to generate any momentum."
Mr. Delisle said investors were taking time to cash in on the run-up in stock prices since early September. He said the correction was likely to be modest, falling a further 6%, because there was a lot of money on the sidelines ready to be invested in any equities dip.
"We do believe markets can go up another 10%-15% before it's time to rein in your horns," he said.
On a day where the markets appeared to be set to erase some of last week's losses, market sentiment turned on a dime, sending the VIX index, a measure of market volatility up more than 9%.
The S&P/TSX composite index fell 147.25 points, or 1.3%, to 11,234.88, with an added drag stemming from a decline in oil prices. Light sweet crude for November delivery fell US$1.82 to US$78.68 a barrel on the New York Mercantile Exchange, weighing down the Canadian dollar, which sank US1.35¢ to US93.72 during the erratic session.
In the United States, the S&P 500 dropped 12.65 points, or 1.2%, to 1,066.95, while the Dow Jones industrial average fell 104.22 points, or 1.1%, to 9,867.96 after trading through the 10,000 level early in the session. The Nasdaq slipped 12.62 points, or 0.6%, to 2,141.85.
The drop has come despite a "stellar" earnings season, Pierre Lapointe, an analyst at National Bank Financial said. He said so far 81% of the first 199 S&P 500 companies to report earnings had come in above expectations on their third-quarter 2009 results.
Eric Lascelles, the chief economist and rates strategist at TD Securities said market sentiment turned negative Monday on concern the U.S. Senate would discontinue a tax credit for first-time home buyers.
"I've heard contradicting information swinging back and forth, but I think there's really concern that the government may intervene in a way that is not as favourable to the markets," he said.
The negativity was compounded by downgrades of U.S. banks SunTrust Banks Inc. and Fifth Third Bancorp by prominent banking analyst Dick Bove. Economic data was also dismal. The Chicago Federal Reserve's National Activity Index, a measure of economic activity, worsened in September, coming in at a negative 0.81 from a negative 0.65 in August.
While the number was weak, Ian Pollick, an economic strategist at TD Securities said the index's levels over the past three months were consistent with the end of recession.
Robert Kavcic, an economic analyst at BMO Capital Markets said the performance of equity market sectors also appeared consistent with stronger economic growth ahead, despite the market correction in the past two weeks. He said defensive stocks, such as health care, staples, telecommunications, continued to underperform, while cyclical stocks, such as those in technology, materials, and industrials, continued to outperform the market average.
"Some other signs of recovery that surfaced early this year also remain intact - think copper prices, which are sitting at a 52-week high," he said.
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