| TSG Weekly Market Watch January 18, 2008 |
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| Written by Matt Blackman | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Saturday, 19 January 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending January 18, 2008Topics Discussed This Week:
Has the bear come out?It was back to gut wrenching drops again for most major indexes with the interesting exception of the Dow Transports that barely dropped this week – perhaps boosted by the drop in oil prices. But the MSCI Emerging Markets ETF (EEM), which was the lone bullish performer in our table last week, got thoroughly pummeled this week dropping nearly 8%. Market reaction to the latest Bush Administration’s bailout plan seems clear – investors weren’t buying it. Although understandable given the candidates’ high stakes game of chicken in vying to outdo one another to see who can come up with the most fiscally irresponsible program, this latest $140 billion giveaway will generate minimal economic impact till next Christmas. Expect to see more downward pressure on the greenback as the cost of political promises and the projected 2008 budget deficit swells. Technically SpeakingAnother challenging week for leadersIt was the third consecutive uphill week for Dan Zanger’s Sunday picks. After dropping more than 7% two weeks ago and 6.3% last week, the leaders fell 9% this week as the fell further and faster than the worst hit indexes. More bearish is the fact that Dan is now back in short mode. His 11 picks this week included Apple (AAPL), Baidu (BIDU), CF Industries (CF), Mosaic Company (MOS), Terra Industries (TRA), Randgold Resources (GOLD), iShare Silver (SLV), Google (GOOG), Murphy Oil (MUR) and Goldcorp (GG). Conspicuously absent were the solar and fertilizer stocks.
Major indexes struggled again this week as the Dow Industrials broke the next level of key support of 12,100 Friday but only just barely. In the process, it got closer to the minimum projected target of the triple top chart pattern of 11,450. But 12,100 has to be decisively broken first. Given that the index is deeply oversold on both the daily and weekly charts, the chances of a bounce from here are good. But to get a real bounce, one that has any chance of lasting more than a few days to a week or two, we need to see capitulation evidenced by spikes in both volume and volatility and that while it hasn’t happened yet, could come any day. Speaking of volatility, one good market volatility measure is the Market Volatility Index (VIX). It jumped again this week to 27.18 from 23.68 last week but is still below the level of 30 or higher that has historically accompanied a major bottom. The means that fear still has a way to go before investors hit the panic mode that generally precedes any sort of rally. However, a synthetic volatility indicator developed by Larry Williams called the Vix Fix is saying that the S&P500 is getting ready to bounce here (see Matt Caruso's Intermarket letter this week). Commodities (and inflation) remained strong as the 17 commodities represented by the NYFE CRB Index stayed glued on the ceiling to close at 490.37 from 490.87 last week. This index remains above its upper 2-standard deviation trend channel making it very overbought – a position it has held for the last six weeks straight. However gold dropped to close at $881.40 down from $896.80 last week. But it is still above the $866.10 close two weeks ago. The U.S. Dollar Index gained a little territory this week closing at 76.50 up from 76.04 last week. But given the political climate for fiscal irresponsibility and weakening economy, this weakness should remain for a while. The NYMEX crude oil (continuous) contract continued to drop this week closing at $89.92/bbl from $92.16 last week. It will be interesting to see how much the weakening economy will impact global oil demand. It is also interesting to note that crude looks to be in the process of finalizing a bearish double top chart pattern with neckline support around $86 (see chart below). If this level gets broken in the next while, the minimum projected target is $73/bbl.
Figure 2 – Daily chart of crude oil continuous showing the bearish double top chart pattern with a neckline around $86 with a projected minimum target of $73. Chart by GenesisFT.com This week, the U.S. prime bank rate held steady at 7.25%, the effective Fed funds rate dropped to 4.16% (4.25% target) while the 3-month London Interbank Offered Rate (LIBOR) slipped to 3.894% from 4.2575% last week and 4.62% two weeks ago and 4.728% three weeks ago. The LIBOR drop is good news for credit markets and mortgage rates. Freddie Mac mortgage rates ranged from a high for the 30-year fixed mortgage of 5.69% (5.87% last week) to a low of 5.26% (5.37% last week) for the one-year adjustable rate (ARM). EarningsDown how much?The second week of Q4-07 reporting season wound to a close this week and with a total of 573 companies now checking in and unless it’s a mistake, earnings were down 73% from the same quarter last year according to the Wall Street Journal. This compares to a drop of 26% last week with 415 companies reporting. Some of the worst hit were clothing & accessories (Consumer Goods) down 88% and oil equipment & services (Oil & Gas) down 78%. While we are still in the early stages and results can fluctuate wildly, let’s hope that this week’s results are an anomaly. A total of 4205 companies reported Q3-07 results and average earnings fell 21% from the same quarter the year before compared to a 13% jump in Q2-07. Economic ReportsHere are the reports we were following this week. Thursday’s big stock drop came partly with the news that the Philadelphia Fed Business Index which measures national manufacturing and production, plunged to -20.9. It followed the first drop into negative territory in December of -1.6. A value below zero shows contraction and this month’s index was the lowest since during the last recession in October 2001 putting one more nail in the ‘no-recession’ argument coffin. Sales of Treasuries rise
Chart 1 – International capital flows into US Treasuries bounced back in November hitting $149.9 billion showing that the greenback is still very much alive and well in capital markets despite its four-year fall to new lows. Foreigners purchased a total of $90.9 billion in net long-term securities compared to $114 billion in October and just $26.4 billion in September. Seems no matter how weak the dollar, it is still a safe haven for foreigners in times of uncertainty. This should help the strength of the dollar as long as this trend continues. New home market lies dormant on basement floor
Chart 2 – It doesn’t get much worse than this. The National Association of Home Builders housing market index was 19 in January and the December number was revised from 19 to 18 which is the worst survey reading ever, reflecting the gloom that continues to permeate the industry. Unlike the perma-grin spin doctors at the National Association of Realtors, instead of trying to pump the market with helium hype, NAHB President Brian Catalde laid his cards out on the table. “Builders are taking a realistic view of the continuing housing market correction and doing what they should to get inventories under control and restore greater balance to the supply and demand equation,” he said in a January 16 news release. However, chief economist Seiders could not resist the urge to add his two cents worth of hype. “Builders are anticipating a time when market conditions will support an upswing in building activity – most likely in the second half of 2008.” He may have a point; things can’t really get much worse… that is unless the rest of the economy enters recession. In January, the three parts of the HMI were as follows: the index measuring current sales conditions nationwide held at 19, sales expectations for the next six months rose 2 points to 28 and traffic of prospective buyers rose 1 to 14. Could someone explain to me why builders think sales will be twice as good in six months as they are now? None of my leading indicators including housing permits/starts (see below) give any hint of this and buyer traffic is dropping. Starts/permits take big hit
Chart 3 – Housing permits plunged 8.1% while starts fell 14.2% in December in more evidence that any bottom to this housing market is still distant. On a year over year basis, housing permits are down 35% and starts are down 38%. From their peaks in January 2006, permits and starts have been more than cut in half falling 52% and 56% respectively. Next WeekOnly a couple of reports worth watching this week with one possible exception not listed below and that’s the December Chicago Fed National Activity Index (previous -0.27) which given the rapidly weakening manufacturing indices could provide confirmation of the weakness or some hope Tuesday.
SynopsisBear questionThe big question is whether the bear market that our indicators have been warning about is finally here. Here is a summary of how far the major indexes have dropped from their 2007 peaks. As we see from the following table, only the Dow Transports and Russell 2000 have dropped more than the 20% needed to label them bears. Although not there yet, the Nasdaq is getting close.
But as always in the early stages of a bear market, doubt reigns supreme and doubt about the arrival of the bear is one that economists and a number of retail analysts have been doing their level best to promote. When prices have dropped this much, there is a powerful temptation to try and pick a bottom but it’s one that seasoned traders resist with all their might until they have confirmation. It is for good reason that this practice has become known as trying to catch a falling knife. One potent characteristic of bear markets is the potentially explosive nature of bear rallies. Value investors often make the mistake of assuming that rallies are proof that the bear market has died and a new bull has begun causing them to jump in with both feet. But don’t be fooled. Like bulls, bear markets usually last longer and are more severe than most expect and one should only change hats when there is solid evidence that the time has come. Right now we hang in no man’s land – stuck between a four-year bull market and the possible beginnings of a secular bear. With each index that drops 20%, evidence that the bear has arrived mounts. One would think with all the money and hype being pumped into the financial system that stocks would have to benefit. And that just might happen but it hasn’t yet. As government efforts to ‘fix’ the problem mount, I expect the Fed to get drawn into the game and there is growing pressure to drop the Fed funds rate 50 or even 100 basis-points. This would be painful for the dollar but the Fed has shown at times like these that the greenback and inflation concerns take a back seat when jobs and an election are on the line. At times like these and unless you are a short-term trader, it’s best to be in cash.
Stories of interest this week… The technician’s technician – Bear Market in Force -- C-YA! U.S. Stocks Decline on Citigroup's Loss, Drop in Retail Sales Citi writes off $18 billion Intel's Revenue Forecast Falls Short; Shares Slump JPMorgan Fourth-Quarter Earnings Fall, Miss Estimates Bank of America Will Cut 650 Investment Banking Jobs Sayonara to the carry trade? - FT An international approach to commercial real estate – FT U.K. Housing Market Was Worst Since 1992 in December Canadian Housing starts drop 20% in December – FP Economic impact for the 'Lilliputians' remains uncertain – FT Worldwide financial job losses triple in 2007 ------------------------------------------------------------------------------------------------------ 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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