Here are some of the fundamental reasons for last week's sell-off. As you will see, there were plenty of strong reasons for traders to start taking profits.
1.) The BEA lowered GDP estimates from 3.5% to 2.2%. First, this is a large revision. People will make entirely different economic assumptions about an economy growing at a 3.5% growth rate than an economy at a 2.2% growth rate. Secondly, this is the third quarter of sub-par growth, indicating we are definitely in the cooling off stages.
2.) New Home sales dropped 16%. There is a high margin of error with this number, so it can be revised upwards. However, the initial reading put the "the housing market has bottomed" people out to pasture.
3.) Durable goods orders dropped 7.1%. Even without transportation, this number dropped 3.1%.
4.) Weekly unemployment claims are ticking up. The 4-week moving average increased from 327,000 on February 10 to 335,000 in the latest report. However, bear in mind this is a noisy report and is subject to revisions etc...
5.)While personal income increased (a net positive) the core PCE inflation level increased .2%. This takes away fuel to the "Fed will lower interest rates soon" argument.
6.) Construction spending dropped .8% in January. This adds further fuel to the slowing housing market story.
7.) While existing home sales increase last month they did so because of a 5% December to January price decrease, a 3.1% year-over-year price decrease, a 3% increase in the month-to-month inventory and a 23% yeare-to-year inventory. In other words, the high inventory figures are starting to hit prices.
8.) Countrywide Financial announced 20% of the subprime loans they service are late with payments. This indicates there is probably more trouble ahead for an already troubled part of the economy.
To sum up, the overall economy is slowing, housing has not bottomed, and inflation will keep the fed from lowering rates.
This is the kind of news that leads to sell-offs.
