| TSG Weekly Market Watch November23, 2007 |
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| Written by Matt Blackman | ||||||||||||||||||||||||||||||||||||
| Sunday, 25 November 2007 | ||||||||||||||||||||||||||||||||||||
 TSG Stock Market LetterWeek Ending November 23, 2007Topics Discussed This Week:
A real turkey of a week…After a ho-hum week last week, it was a slow 3 ½ day week and volumes were low as traders and investors took time off for Thanksgiving. While stocks rallied on low volumes Friday thanks to initial reports that Black Friday was being kind to retailers, the overall picture remains negative from both a technical and a leading economic indicator perspective. Financial stocks were again weaker on deteriorating earnings growth and this has stolen a major gust from the bull’s sails – until this quarter, strong earnings have been a significant stock bulwark in support of higher prices. Given the low volumes and conflicting market signals, next week will be an important one to watch. Technically SpeakingLeaders tick back upThis week, while the large cap indexes fell, Dan Zanger’s market leaders turned higher gaining nearly 3% over the last five days versus -1.5% for the Dow Industrials, -1.54% for the Nasdaq and -1.2% for the S&P500. Hits picks this week again included past favorites, Research in Motion (RIMM), Apple (AAPL), First Solar (FSLR), Google (GOOG), National Oilwell (NOV) and Holders Trust Oil-Service (OIH) as well as Golden Telecom (GLDN), POSCO (PKX). Even with the big down day for indexes Wednesday, Zanger’s stocks held their own and then rallied higher on Friday. While this has bullish implications, it has been a very volatile trading environment for traders with the fastest of reflexes and strongest stomachs. However, this does increase the probability of a rally next week.
Weekly trading volumes were low this week while the S&P500, Dow Industrial Average and Nasdaq Composite moved down. But while the Industrials fell, the Transports dropped even further and as we see from Figure 3 below, broke a longterm trendline and head & shoulders top neckline which is bearish. According to Dow Theory, a convincing breach by the Dow Industrials of 12,845 would confirm that both indexes are now in a downtrend. While the Industrials did close at 12,799 on Wednesday, the index quickly rallied back above it and this level must be decisively broken to confirm the trend reversal. To make matters even more interesting, a decisive breach of 12,860 for the Industrials would also confirm a bearish double-top chart pattern… so traders will be watching the large caps very carefully next week. Volatility settled back a little this week as the Market Volatility Index (VIX) closed at 25.61 up slightly from 25.49 last week but shows that investors are still jumpy. Commodities represented by the NYFE CRB Index regained some of the territory last week thanks in part to strong oil and gold prices closing this week at 457.39 up from 450.11 last week and 456.36 two weeks ago. This surge put the index back above its upper 2-standard deviation trend channel. Gold recovered this week to close at $822.20/oz up from $787/oz last week but is still below $834.60/oz two weeks ago. Meanwhile, the U.S. Dollar Index resumed its slide to close at 75.07 down from 75.84 last week. The euro came very close to rising about 1.50 US Friday but then backed off slightly at the end of the day. Oil surged back towards $100 again this week as the NYMEX crude oil (continuous) contract ended the week at $98.18/bbl up from $93.84 last week and $95.30/bbl two weeks ago. Fed – All quiet on the money front
Figure 2 – Here we see that the Fed left the effective Fed funds rate at 4.51% since last Friday. Not shown is that the Fed pumped another $47.25 billion into the banking system (markets) on November 15 for the biggest daily injection yet since shortly after 911. Even with this large cash transfusion, markets have languished. In another sign of market stress, the MSCI Emerging Market Index ETF (EEM) continued to fall closing at 147.34 down from 153.80 last week and 161.70 three weeks ago as investors continued to sell emerging market shares in favor of Treasuries and more secure corporate bonds. As evidence, two-year Treasury bond yields dropped below 3% for the first time since 2004 as investors bid up the price (bond yields move inversely to price) and there was more evidence of the carry trade unwinding. See articles below. This week, the U.S. prime bank rate held steady at 7.5% while the 3-month London Interbank Offered Rate moved up this again to 5.04% from 4.948% last week and 4.879% two weeks. LIBOR is used in computing mortgage rates. Fannie Mae 30-year mortgage (30 day) yields backed off again slightly to 6.079% from 6.095% last week and 6.168% two weeks ago. EarningsWeakness continues…Another 281 companies reported Q3-07 results this week bringing the total to 3919 companies that have reported so far this earnings season. Earnings fell again to -20% versus Q3-06 (from -19% last week). This compares to an average earnings improvement of +13% for Q2-07 versus the same quarter the year before. This week earnings for the financials group dropped to -27% versus (from -25% last week) which is important given that financials tend to lead the broader market. Economic ReportsJust a couple of reports worth discussing in this holiday shortened week and both had to do with the housing market. And then there were comments from Bernanke at Tuesday’s Federal Open Market Committee meeting. The key when it comes to the Fed is pay strict attention to what they do, not what they say. If you still want to read what they are saying, see ‘Fed’ article below. Housing market index on basement floor…
Chart 1 – On Monday, the National Association of Home Builders (NAHB) released their November Housing Market Index that hit 19. The October number was revised upward from 18 originally reported to 19 for the worst reading since the index started in January 1985. Like the National Association of Realtors, the NAHB targeted the national media “that has tended to report negative housing stories as if there is on real estate market, when in fact, there is no such thing,” according to their latest news release. That may be true but housing prices are plummeting and foreclosures rising in more markets than not across the country and that is not the media’s fault. In November, the index that measures responses from more than 300 builders across the country on three different aspects of the market remained flat at 18 for current single family new home sales, dropped one point to 25 for sales expectations over the next six months while the expectation for prospective buyers rose two points to 17. Yes, housing starts are up but permits are down twice as much…
Chart 2 – On Wednesday we learned that housing starts ticked up 3% in October. But before breaking out the champagne, we also learned that permits, not mentioned in most media reports, dropped 6.6% during the same month and since permits lead starts, that is bearish. Looking at the bigger picture, we are in what looks to be the steepest new home construction decline in history and there is still no end in sight. From their peak in September 2005, permits have fallen 48%. Next WeekIt’s back to normal next week. Here are the reports we’ll be watching next week.
SynopsisFlashlight beam in the tunnel?It is interesting that US financials continue to weaken and that as of the latest corporate earnings reports Q3-07 earnings for financials are still dropping from Q3-06. We may see stocks rally next week as they are pretty oversold but if financials continue to weaken it will continue to be bearish for the overall market. The rally Friday is meaningless given the very low volumes and we’ll have to wait for action next week and great volumes to get a better idea. Investor sentiment is still quite bearish and that interestingly enough is one factor in favor of a rally from here - markets rarely tank when pessimism is high but it is still not yet at extreme levels, levels from which rallies begin. If Black Friday in the US turns out to be positive (like it is looking like it will) investors will get optimistic and with an oversold market and bearish sentiment, we have the makings of a potentially strong rally – possibly through Christmas. However, it will be one that bears will short in lieu of drastically better news on the credit front setting up what could be a brutal post New Year.
Figure 3 – Weekly chart highlighting breakdown in the Dow Jones Transports Average. It shows the bearish head & shoulders top pattern with left shoulder, head, right shoulder with neckline (dashed blue line) and long-term trendline (cyan line) – both trendlines have now been broken to the downside. The light red arrows show the breaches. For the technical traders, note the negative divergence between the index and the 14-week Relative Strength Index (magenta dashed line) the latter of which peaked in May 2006 and has fallen while the index moved higher. This has further bearish technical implications for the Transports. Chart by TradeStation.com Stories of interest this week… Link to new recession watch report (updated again this week) http://tradesystemguru.com/content/view/113/61/#Recession Link to book site – Ahead of the Curve (some very interesting charts!) http://www.aheadofthecurve-thebook.com/charts.html Knowing the known unknowns of a possible market disaster Treasury Two-Year Yields Fall Below 3% for 1st Time Since 2004 http://tinyurl.com/ywfyqq Carry Trade – Yen Gains Versus 16 Major Currencies as Investors Reduce Risks Fed Pares Growth Forecast, Calls October Cut `Close' http://tinyurl.com/27mpkp Chronology – The Credit Crunch of 2007 http://tinyurl.com/27j79d ------------------------------------------------------------------------------------------------------ If you find this newsletter insightful, please feel free to forward this newsletter and share it with a friend (or simply have them opt-in free from our home page http://www.tradesystemguru.com to be added). DisclaimerTradeSystemGuru.com obtains information from sources deemed to be reliable; |
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