| TSG Weekly Market Watch January 4, 2008 |
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| Written by Matt Blackman | ||||||||||||||||||||||||||||||||||||
| Saturday, 05 January 2008 | ||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending January 4, 2008Topics Discussed This Week:
Santa delivers a couple of achers for ChristmasIt was another sea of red this week and as it turns out, last week’s red show was just a precursor. While the Russell 2000 was worst hit last week, that dubious distinction was reserved for the Dow Transports this week which registered a nearly 8% drop. Not only was it the worst start for the Dow Industrials since 1904, it was the worst ever start to a new year for the Nasdaq. As well, the much hoped for Santa rally that comes between December 17 and January 7 is MIA. With two days left, the First Five Days (FFD) of January indicator we discussed last week looks bleak with the S&P now down 3.9% in the first three days. The good news is that while more than 75% accurate when it’s positive, the FFD indicator barely has a 50-50 record in down years so there is still hope – that is as long as you don’t look at the leading market and economic indicators... Technically SpeakingLeaders take it on the chinLike the majority of stocks, Dan Zanger’s Sunday picks dropped like a rock this week (after gaining 1.6% last week) losing more than 7% making the composite the second worst performer behind the Dow Transports on our chart below. But then again, isn’t that what market leaders are supposed to do? At the risk of stating the painfully obvious, this is not a good sign. His 12 picks this week again included Apple (AAPL), Baidu (BIDU), First Solar (FSLR), Solarfun Power (SOLF), Research in Motion (RIMM), PetroBrasil ADR (PBR), Transocean (RIG) as well as Ascent Solar (ASTI), US Steel (X), CF Industries (CF) and Dryships (DRYS).
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. While the major indexes were pummeled and the Dow Industrials again broke Dow Theory threshold support at 12,845.78 which was necessary to confirm the downtrend in line with that of the Dow Transports, other major support levels like 12,800 for the Industrials and 1,400 for the S&P500 are holding as is the four-year uptrend support line on the SPX. But another bad day for stocks would see these levels disintegrate as fast as a rotten bridge under a 20-ton truck. As we see here, the Dow Transports has already broken down and is in the throes of a reversal.
Figure 2 – Weekly chart of the Dow Jones Transports Average showing the three breaches before its four-year uptrend line was decisively broken signalling the end of the rally. Chart by GenesisFT.com One positive sign if there was one, is the fact that weekly trading volumes were again well below average that given the size of the drop means that most investors have so far remained on the sidelines. Volatility took off again this week as the Market Volatility Index (VIX) jumped to 23.94 from 20.74 last week and 18.47 the week before. Markets were hit with a double bladed sword this week and both edges cut deep. Stock drops were compounded by a rapidly rising risk of inflation as the 17 commodities represented by the NYFE CRB Index which surged again to 485.02 from 475.43 last week. This index remained above its upper 2-standard deviation trend channel again this week. Again this week, commodities were led by gold which exploded to the upside as the yellow metal closed at $866.10 up from $842.60/oz last week, $815.80/oz two weeks ago and $798.10/oz three weeks ago. For the second week in a row, the U.S. Dollar Index closed down on the weaker economic data and more credit concerns at 75.82 from 76.24 last week and 77.74 the week before. Oil rose again this week as the NYMEX crude oil (continuous) contract closed at $97.69 from $96.00 last week, $93.31 the week before and $91.55/bbl three weeks ago. Trades printed at $100/bbl this week for the first time in history even after adjusting for inflation from highs in the 1970s. This week, the U.S. prime bank rate held steady at 7.25% while the 3-month London Interbank Offered Rate (LIBOR) slipped to 4.62% from 4.728% last week and 4.857% two weeks ago. 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 6.07% down from 6.17% last week to a low of 5.47% from 5.53% last week for the one-year adjustable rate (ARM). EarningsFinal results are in and they aren’t goodWith a new reporting season just around the corner, a total of 4205 companies (up from 4198 companies last week) have now reported Q3-07 results. Earnings declines were down 21% (down from -20% two weeks ago) versus Q3-06. This compares to an average earnings improvement of +13% for Q2-07. In the final analysis, financials registered the worst results dropping 28% from Q3-06. Consumer services were next with a 13% drop. Throughout Q3 earnings reporting season, results continued to deteriorate which is a concern especially considering that financials that lead the market, and consumer services that measure the health of the consumer, were the worst performers. Economic ReportsHere are the reports we were following this New Year’s Day shortened week. Existing home sales come in above expectations
Chart 1– After the shock we got Friday when it was learned that new home sales fell 9% in November, the 0.4% gain for existing home sales was a pleasant surprise. It was the first gain in the last nine months so probably a short-term bounce. And for what it’s worth, median home prices also went up from ($206,900 to $210,200) which is a little hard to believe especially considering the negative news from the more reliable Case-Shiller home price index for October last week that showed home price declines accelerating. A total of 5.0 million homes were sold on an annual basis up from a revised figure of 4.98 million last month while unsold inventories dropped to 4.273 million from 4.433 in October. At the current rate of sales, that equals a 10.3 month supply. Manufacturing news turns negative Chart 2 – Last week the market was pleasantly surprised by stronger than expected December Chicago Purchasing Managers Index of 56.5 up from 52.9 in November but that was not confirmed in nationally in the ISM as the number came in way below expectation at 47.7. It was also the lowest number in at least two years and well below the contraction threshold of 50. The ISM Non-Manufacturing or Service Business Index dropped to 53.9 in December from 54.1 last month which while still above contraction, has also been steadily trending lower.
Chart 3 – More bad news this week – November construction spending fell 2.5% versus the consensus estimate of a 0.4% drop and a long way down from the revised 0.4% drop in October. As you can see from this chart, the November drop was more than double the previous worst monthly performance in July 2006. Jobs/unemployment take big hit
Chart 4 – The unexpected drop in December to just 18,000 new non-farm jobs spooked markets Friday. It was the lowest reading in four years and showed just how quickly jobs can disappear. The silver lining of sorts was that the November number was revised upward from 94k to 115k but that only accentuated the size of December’s decline. Another shock was the speed at which the unemployment rate jumped – from 4.7% in November to 5% in December. As we have mentioned in the past, jobs and unemployment are lagging indicators so the fact that they are at recession levels now confirms how fast the economy has slowed. Next WeekIt will be back to normal next week. Here are the reports we’ll be watching.
SynopsisHard to put a positive spin on the weekNo matter which way you slice it, the action this week is hard to view in a positive light. The spreading credit and derivative contagion has brought a host of cockroaches out into the open and they became all-too visible this week with bad employment and jobs data, declines in manufacturing and construction spending and though existing home sales data wasn’t negative, any positive interpretation defies logic especially considering more credible data to the contrary.
Figure 3 – Weekly chart comparing the S&P500 to the Average Fed funds rate in 2000 and now. Drops didn’t help the market then and they have so far proven ineffective at doing so again. Chart by Metastock.com This week we update our S&P500 versus the average Fed funds rate chart and see that while the Fed did act more quickly this time around than in 2001, it has done little to stem stock market losses except that this time around, there is no housing or real estate market to help deflect the impact of falling stock prices. Given the current state of the economy and market, any drop in the Fed funds rate no matter how big is unlikely to reverse falling home and property prices any time soon. But the question remains, will it be equally ineffectual for the stock market? We think any FFR drops from here will have at best a short –term affect. This is as good a time as any to point out that a very small percentage of economists saw this type of data coming and I can count them on the fingers of one hand. They include Robert Shiller, David Rosenberg and Steven Roach. As pointed out in November by Economist magazine, 95% of economists surveyed in March 2001 said there would not be a recession when one had already started. At least the profession is consistent! I wonder how many will now change their tune in light of these latest data? It would also appear that following stock market sector and industry performance is not part of their analysis regime. If you haven't yet, be sure to check out our latest Special Report entitled... A look at the big picture for 2008 - What a way to start a year! To read it click this link.
Stories of interest this week… Forget oil, the new global crisis is food The era of easy money is over – FT Loonie, stocks tumble as U.S. recession risks rise ------------------------------------------------------------------------------------------------------ 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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