| TSG Weekly Market Watch December 28, 2007 |
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| Written by Matt Blackman | ||||||||||||||||||||||||||||||||||||
| Sunday, 30 December 2007 | ||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending December 28, 2007Topics Discussed This Week:
For those who have not had a chance to take our TSG survey, we value your input.…Still waiting on the rallyAfter nearly all green across the board last week, it was back to all red with the small cap Russell 2000 Index dropping nearly 2%. Monday is the last trading day of the year which means there are just four days of the traditional Christmas rally period left. The first five trading days of January will also be closely watched because they have a habit of portending the rest of the year. We discuss this phenomenon in more detail below. Technically SpeakingLeaders head higherDan Zanger’s Sunday picks again rose, gaining 1.6% (versus +0.7% last week) outperforming the major indexes. It is bullish that they rose and again led the market. His 13 picks this week included Apple (AAPL), Baidu (BIDU), First Solar (FSLR), Google (GOOG), Solarfun Power (SOLF), Foster Wheeler (FWLT), Research in Motion (RIMM), Murphy Oil (MUR) and Holders Oil Services (OIH) as well as PetroBrasil ADR (PBR) and Transocean (RIG).
Figure 1 – Weekly performance of Zanger’s market leaders compared to the S&P500 (SPX), the Dow Jones Industrial Average (DJX), Dow Transports (DTX) and Nasdaq Composite (IXIC). Data courtesy of The Zanger Report, performance chart courtesy of VectorVest.com. Weekly trading volumes were well below average that given that the market was flat means that investors aren’t willing to commit their funds. Volatility settled back a little more again this week as the Market Volatility Index (VIX) closed at 20.74 up from 18.47 last week. It was another good week for the 17 commodities represented by the NYFE CRB Index which surged to 475.43 up from 474.59 last week. This index remained above its upper 2-standard deviation trend channel again this week. But this week gold joined the commodity party. After breaking out of its consolidation pattern the yellow metal closed at $842.60/oz up from $815.80/oz last week and $798.10.oz two weeks ago. After four consecutive up weeks, the U.S. Dollar Index closed down hard this week on weaker housing data and more credit concerns at 76.24 from 77.74 last week. Oil gained again this week as the NYMEX crude oil (continuous) contract closed at $96.00 up from $93.31 last week and $91.55/bbl two weeks ago but still well off its weekly high of $98.18/bbl four weeks ago. This week, the U.S. prime bank rate held steady at 7.25% while the 3-month London Interbank Offered Rate (LIBOR) slipped to 4.728% from 4.857% last week. LIBOR is used in computing approximately 90% of mortgage rates so an important number to watch. Freddie Mac mortgage rates ranged from a high for the 30-year fixed mortgage of 6.17% (up from 6.14% last week) to a low of 5.53% (up from 5.51% last week) for the one-year adjustable rate (ARM). EarningsEarnings worsen againA total of 4198 (up from 4184 companies last week) have now reported Q3-07 results and improvements dropped to -21% (down from -20% last week) versus Q3-06. This compares to an average earnings improvement of +13% for Q2-07. Economic ReportsHere are the reports we were following this short Christmas week. Home price declines continue to accelerate
Chart 1 – Home prices in 20 of the largest cities across the nation fell 6.1% in October versus a year ago according to the Case-Shiller Home Price Index that unlike median price data used by government and the National Association of Realtors, relies on much more accurate paired sales data. Home prices in the 20-city composite index have fallen 6.6% since their peak in July 2006 and 7.3% for the 10-city composite index. It is the 10th consecutive month of declines and the 23rd month of decelerations in home prices. This indicator clearly shows that home price declines continue to accelerate which does not bode well for a bottom in the housing market anytime soon. New home sales disappoint but that’s not all…
Chart 2 – Wall Street got a shock Friday when it was learned that new home sales fell 9% in November from October to a twelve-year low of 647,000 homes. But what was not publicized was that figures were also revised downward for August, September and October as well necessitating revisions in our chart. Last month, it was reported that October new home sales rose 1.7% when in fact they fell 0.7%. By our calculations, new home sales are down 34.5% from last November when 987,000 homes were sold. According to the Census report, the median price of a new home was $239,100 but take this number with a large grain of salt given the widespread practice by builders of offering huge cash and other incentives to make sales which are included in the home price. According to this statistic, while new home sales have fallen dropped 35% in the last year, incredulously the median price of a new home is down just 0.4%? Another example of just how misleading median price data can be is the difference between existing and new homes. So far the median price of an existing home (85% of the market) has fallen nearly 10% from its peak while the median price of a new home is down 0.4% which is all the more incredible when you consider that the new home market has been even harder hit than existing homes. While inventories of new homes for sale dropped to 505,000 homes, the average time to sell a home increased to 9.3 months. Some good manufacturing news?
Chart 3 – There was one good piece of news and that was the unexpected Chicago purchasing managers index jump from 52.9 in November of 56.5 in December. We will now have to wait to see if this is confirmed in the broader Institute of Supply Management number due next Wednesday. Next WeekIt will be a quieter week around New Year's Day. Here are the reports we’ll be watching. · Monday, November Existing Home Sales (previous -1.2%).· Wednesday, December ISM Manufacturing Business Index (previous 50.8), November Construction Spending (previous -0.8%), Federal Open Market Committee Minutes.· Thursday, November Factory Orders (previous 0.5%).· Friday, December Nonfarm Payrolls (previous 94,000), December ISM Non-Manufacturing (Service) Business Index (previous 54.1).SynopsisYear winds to a close…While we are in long mode, we remain cautiously optimistic since from the prospective of the major indexes, we are in no-man’s land. As we see from the chart below, the Dow Transport and Dow Industrial Averages are still trending in opposite directions that according to Dow Theory mean that a trend cannot be confirmed. The Industrials remain above key support at 13,000 and the S&P500 above 1435 so they are officially still in an uptrend. Low volumes over the last month further obscures the technical picture.
Figure 2 – Weekly chart of the Dow Industrial Average versus the Dow Transports Average (purple) showing opposite trends. Chart by GenesisFT.com
Figure 3 – Another look at seasonality from the perspective of the S&P500. This chart shows how S&P500 futures contracts have performed over the last twenty years (blue line) compared to this year (black candles) showing that typically the biggest lift ends at the beginning of February so there is still time for that seasonal rally the bulls have been hoping for. However, that we have not had it so far is bearish. Chart courtesy Stewart Taylor – EatonVance.com On the positive side, we have market leaders heading higher but concerns that markets have not done better given that this is generally a bullish time of the year, especially considering that we are approaching an election remain. Friday will mark the last trading day of the pre-election year which as we have said before is the best of the four-year cycle – the election year is a distant second. As we see from Figure 3, the seasonal lift that historically starts in late October has yet to materialize. Here is how Stewart Taylor of Eaton Vance Management explains equities performance so far. “As I see it, the failure of the market to rally over the first ½ of the bullish seasonal [period] isn’t positive. That said, if credit spreads are going to narrow and if stocks are to rally, the next 30-40 trading days is when the gains should come.” As we approach the New Year we have two more indicators to watch. The first is called the January Early Warning System and was first observed by Yale Hirsch, founder of the Stock Trader’s Almanac. According to the 2008 Almanac, “the last 36 up Five Days were followed by full-year gains 31 times for an 86.1% accuracy ratio and a 13.7% [S&P500] gain in all 36 years.” However, a negative First Five Days in January is less than 50% accurate. “The 21 down First Five Days were followed by 11 up years and 10 down years.” Looking at the longer picture, there is another indicator called the January Barometer that uses S&P500 January performance as a proxy for the rest of the year, but more about that next week. Another point worth mentioning from the 2008 Stock Trader’s Almanac – the last trading day of the year has been down for seven straight years for the NASDAQ while the Dow has been down seven of the last eleven years. New Year’s Eve is not a bad day to take off is history is any guide. Lastly, we have just updated our Recession Watch Report and here is our latest chart from Hugh Moore of Guerite Advisors with the following explanation. "Since the Guerite Indicator signaled high-risk conditions in late 2006, it has not reversed itself and has continued to be confirmed by additional robust recessionary indicators. Currently, one of the most broadly-based Federal Reserve Bank indicators is at the threshold of a recessionary signal. Unless the economy changes direction – and quickly – it is highly probable that the Guerite Indicator’s recessionary signal will again be proven correct. Such an outcome will prove difficult for the U.S. equity markets. Therefore, the Guerite Strategy remains in a fully-hedged position."
To view our updated report, please go to http://tradesystemguru.com/content/view/113/61/#Recession Happy New Year to all! Stories of interest this week… U.S. Economy: New-Home Sales Tumble to 12-Year Low Ominous signs for students of history – FT 'Fear' index jumps amid new worries over banking losses – FT Subprime crisis hits papers' property adverts – FT Dollar's Share of Currency Reserves Falls, IMF Says Subprime's Hidden Cost Is Shrinking Leverage ------------------------------------------------------------------------------------------------------ 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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