US stocks ended slightly lower yesterday as fatigue set in after a six-day rally and disappointing Japanese growth data provided a fresh reminder of the headwinds facing the global economy.
The benchmark S&P 500 index had risen three per cent over the prior six sessions, its longest rally since December 2010. But gains had slowed, with the index hovering at highs not seen since May. The S&P 500 was still up 1.8 per cent for the month.
Stocks have been buoyed by expectations central banks would step in soon to support the flagging global recovery and roll back the Eurozone debt crisis.
Much of the action, however, is unlikely before September, when the Federal Reserve and European Central bank next hold policy meetings, leaving markets in a holding pattern until then.
“Coming off the heels of a light week on the economic front, the markets remain in what some have called a state of ‘melting up.’ Whether the market’s strength is artificially induced or not, the greater risk for traders at the moment is in missing out on the upside,” said Randy Frederick, managing director of Active Trading & Derivatives at Charles Schwab.
With “the European Central Bank, the US Federal Reserve and the People’s Bank of China all standing in the wings ready to take action to support their respective economies, the downside risks in the market have been greatly reduced at the moment,” he added.
The CBOE VIX Volatility index, seen as a proxy for investors’ fears, fell more than seven per cent to 13.70, its lowest level in over five years. The decline was unusual as the index typically moves inversely to the S&P 500, suggesting investors were not overly concerned about the market’s outlook.
“Bullish sentiment in equities remains high with S&P 500 one-month call-side skew now at the 98th percentile,” said the Credit Suisse equity derivatives strategy team. A skew refers to the balance between options betting on the S&P 500 falling or rising.
The Dow Jones industrial average ended down 38.52 points, or 0.29 per cent, at 13,169.43. The Standard & Poor’s 500 Index dropped 1.76 points, or 0.13 per cent, at 1,404.11. The Nasdaq Composite Index was up 1.66 points, or 0.05 per cent, at 3,022.52.
Japan’s gross domestic product expanded just 0.3 per cent in the April-June period, half the expected pace, raising doubts about the strength of the recovery and highlighting the impact of Europe’s debt crisis on worldwide demand.
On Friday, the head of the San Francisco Federal Reserve said the Fed should launch a fresh round of bond buying to lower the US unemployment rate more quickly.