| TSG Weekly Market Watch April 4, 2008 |
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| Written by Matt Blackman | ||||||||||||||||||||||||||||||||||||
| Sunday, 06 April 2008 | ||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending April 4, 2008Topics Discussed This Week:
Optimism still riding roughshod on Wall Street? Monday – It was the end of a challenging quarter and other than a lot of portfolio shuffling, investors made bullish bets based on a drop in crude prices and on hopes that the Fed’s money pump would cure all ills. The Dow ended the day up 46 points. However, the S&P500 is down 9.9% since the beginning of the year but it is clear from the bullish bets on financials and homebuilders, that investors are hoping we have hit bottom. This was clear with the performance of the Philadelphia Housing Index (HGX) of homebuilders that was up more than 15% since the January 18 low. They have obviously forgotten the HGX bull trap rallies of July 2006 to February 2007 when the index gained 34% and April to June 2007 as it jumped 8.3% only to drop to new lows in each case. Tuesday – Optimism again rode roughshod through Wall Street on hopes that the worst of the credit crunch was again over on news of writedowns at two more major European banks. Investors bought stocks on the idea that this would be the last such revelation. It was the third huge jump in the Dow this year as the Dow gained 391 points (3.2%) in spite of the fact that construction spending fell and the ISM manufacturing index remained in the contraction zone. Whoever said investors were logical? Wednesday – But then Ben uncharacteristically created more doubts with gloomy comments on the economy saying recession looked more likely than he’d previously estimated causing the Dow to fall 49 points. February factor orders fell 1.3%. Thursday – After the market gyrations, it was time for pause as markets were basically flat on the day even though another manufacturing metric – the ISM service index showed the sector was still contracting. Friday – Investors again acted bullishly in spite of a bigger than expected drop in jobs and rise in unemployment above 5%. Late day selling pushed the Dow into negative territory (-17 pts) showing the investors are still nervous about holding stocks over the weekend. Seemly unnoticed was the rating downgrade of the world’s largest bond insurer, MBIA from AAA to AA by Fitch that spells bad news for institutions and corporations holding this debt. It means they must come up with even more cash to maintain precarious capital ratios (see article “MBIA” below). Technically SpeakingBut leaders hold their own Dan Zanger’s Sunday picks were again at the head of the pack gaining 9% or nearly triple the Dow Industrials. This is another bullish sign for techs and market leading stocks moving forward. Dan’s 11 Sunday picks again included Devon Energy (DVN), Transocean (RIG), Research in Motion (RIMM), Apple (AAPL), Mastercard (MA), Mercadolibre (MELI), Intuitive Surgical (ISRG) as well as solar winners First Solar (FSLR), SunPower (SPWR) and Suntech (STP). But gone were the financials Goldman Sachs (GS), Lehman Holdings (LEH) Merrill Lynch (MER) and Morgan Stanley (MS).
Figure 1 – Weekly five-day 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. Volumes on the NYSE and Nasdaq again dropped for the fourth consecutive week, which does not bode well for a sustained rally that is unless it’s a bullish consolidation. But I’m not seeing an patterns in any of the major indexes that indicate a consolidation. There have been larger volume increases on down days without a commensurate increase on up days and that is a bearish sign. Stocks can fall ‘of their own weight’ but need a continuous supply of increasing volume to keep rallying. It was the second good week for the MSCI Emerging Markets ETF (EEM) as it gained 5% (up from 4% last week). That bearish head & shoulders top pattern we mentioned in the last couple of weeks with a neckline support line at 130 means the ETF must now drop more than 10 points to confirm the pattern. Volatility settled again this week as the Market Volatility Index (VIX) dropped to 22.45 from 25.76 last week and 31.16 three weeks ago. As mentioned last week, although the belief that a drop from a peak is widespread in financial circles, this theory does not prove out in back-testing. After the largest weekly drop in at least 34 years two weeks ago, the 17 commodities that make up the NYFE CRB Index continued to rise ending the week at 527.22 up from 525.56 last week and 523.80 two weeks ago. Gold continued to weaken as the Comex May 08 contract closed at $907.50/oz. from $933.90 last week. Gold remains in its strong seasonal performance period between the end of January and end of June. Given the global fad by central bankers at money pumping to keep economies going at all costs, it is highly unlikely that the incredible commodity and gold runs are over. That reality was clearly evident in the moribund performance of the dollar as the U.S. Dollar Index held nearly steady to close at 72.02 from 72.03 last week. It will certainly not be helped by the major spike in money supply this year. According to the latest Fed figures, MZM the broadest measure of money supply after M3 was discontinued in 2006 showed an annualized increase of nearly 37% (see the most recent Fed money supply stats in the “MZM” link below.) Meanwhile after the NYMEX crude oil (May08) remained above $100 for the sixth consecutive week closing at $104.90. This week the Fed funds rate held at 2.25% (target). But the 3-month London Interbank Offered Rate (LIBOR) moved up again to 2.7275% (up from 2.6975% last week, 2.606% two weeks ago and 2.76375% three weeks ago) showing that commercial credit markets remain tight. Freddie Mac mortgage rates again moved up to 5.88% (from 5.87% last week and 6.13% two weeks ago) for the 30-year fixed mortgage while the rate dropped to 5.19% (from 5.24% last week and 5.15% two weeks ago) for the one-year adjustable rate (ARM). All the money pumping has yet to translate into lower mortgage and credit costs for the public. Earnings Q4-7 down and out Another 30 companies reported Q4-07 earnings bringing the total to 3900 and not surprisingly earnings improvements held at a dismal -57% (from -56% three weeks ago) versus the same quarter the year before. This compares to a drop of 21% (4205 companies) at the end of Q3-07 reporting season and a 13% jump in Q2-07. Analysts are forecasting an 11% drop next quarter for the S&P500 which means based on history that performance for the broad range of approximately 4000 companies tracked by the Wall Street Journal should be significantly worse and this has proven to be a better advance stock market performance indicator. Economic ReportsHere are the reports we were tracking this week. And here are the charts we are following. Manufacturing, construction weakness continues
Chart 1 – On Monday, we learned that the Chicago Purchasing Manager’s Index for February moved up to 48.2 from 44.5 last month but remained below the contraction threshold of 50. Then on Thursday we learned of the 0.5% drop in February Chicago Fed Midwest manufacturing index.
Chart 2 – Then on Tuesday, February construction spending recovered somewhat but still contracted at 0.3%. As we see from charts 1 and 2, the trends remain strongly negative.
Chart 3 – We also learned Tuesday that the March ISM was below 50 for the third month out of the last four with a reading of 48.6 versus 48.3 the month before. On Thursday the non-manufacturing (service) ISM came it at 49.6 up marginally from 49.3 the previous month for the third consecutive month in contraction territory. Yet another sign of the shrinking manufacturing sector was revealed Wednesday as we learned that February Factory Orders declined 1.3%.
Chart 4 – On Friday we learned that new jobs were falling faster than previously expected with a loss of 80,000 more jobs in March. January and February statistics were also revised downward from –17,000 to –76,000 in January and from –63,000 to –76,000 in February. But strangely this didn’t seem to rattle markets much and the Dow actually moved into positive territory Friday afternoon. But there is no disputing the fact that as a lagging indicator, jobs losses are just one more sign of the coming recession and there will be more bad news ahead as the unemployment rate continues to climb. It jumped 0.3% to 5.1% in March, the highest since September 2005 but is it telling the whole truth? Meanwhile, there was more evidence of growing inflation pressure as average hourly earnings have risen 3.6% in the last year, well ahead of the Personal Consumption Expenditure (PCE) annual inflation rate of 2.7%. More government sleight of hand in jobs numbers? Another point to remember is that the Bureau of Labor Statistics (BLS) uses some statistical smoke and mirrors to calculate non-farm jobs numbers. Each year, the Current Employment Statistics (CES) department adds or subtracts non-farm payrolls jobs based on estimated employment growth generated by new business formations. They claim that there is “an unavoidable lag between an establishment opening for business and its appearing on the sample frame.” For the year April through March 2008, there were a total of 782,000 jobs added using this tactic. In March a total of 142,000 were added. According to the BLS website (http://www.bls.gov/ces/cesbdhst.htm ) this new methodology was “phased in gradually beginning in June 2000.” The problem is, at least as I see is it, this number really should only include business owners since workers they hire should already be included in BLS new jobs statistics. And what happens at the end of the lag period? There is the obvious potential flaw to count jobs twice. In other words, before 2000, the BLS would have reported 222,000 non-farm payrolls jobs losses for March 2008. To add some perspective to this number, over the last three decades, the U.S. economy has experienced three recessions, with the largest single monthly losses (prior to 2001-2) of 342,000 jobs lost in July 1982 and 300,000 lost in February 1991. (There were 325,000 jobs lost in October 2001 but that was after the CES changed the rules of the game.) See http://seekingalpha.com/article/71219-payrolls-drop-and-you-ain-t-seen-nothin-yet Just one more way a government agency has found interesting and innovative ways to put a happy-face bias on the numbers. Next Week Here are the reports we’ll be watching. - Monday, February Consumer Credit (previous $6.9 billion). - Tuesday, February Pending Home Sales Index (previous 0% change). - Wednesday, February Wholesale Trade (previous 0.8%). - Thursday, February Trade Balance (previous $58.2 billion). - Friday, March Import Prices (previous 0.2%). Synopsis So what’s up with Transports? I must admit to have been struggling with the contention by bullish analysts like Dick Bove (who regularly appears on financial TV) that some stocks including financials represent a “once in a generation opportunity to buy.” This is not what our leading sector and fundamental indicators have been flashing so I have become accustomed to tuning out the raging bulls on CNBC and Bloomberg. But one chart was a standout Tuesday. It showed a bullish head & shoulders bottom (H&SB) pattern on the Dow Jones Transports Average that had just been confirmed as the market soared. It is a powerful reversal pattern that often indicates a potential change in trend. But perhaps more importantly, transports stocks are early market leaders in rallies making the pattern even more compelling.
Figure 2 – VectorVest Transports sector index representing seven transportation industries and a total of 145 transportation stocks compared to just 20 for the Dow Jones Transports Average (DJT) confirming the bullish head & shoulders bottom (H&SB) chart action in the Dow Jones Transports Average. Figure 2 shows the broader transportation index published by VectorVest that includes 145 transportation-relative companies compared to just 20 for the Dow Transports Average. As we see, it also showed the same H&SB bullish chart pattern. Further investigation showed that while value (blue line) based on current and forecasted earnings had fallen to $27.93, it was still well above the composite transport index price of $23.29. And like the index, value had also recently turned up. Fundamentals such as earnings per share (EPS) (black line) and earnings growth (GRT) (red line) have fallen as well but were still positive. But given that fundamentals generally lag stock price, this weakening trend was not a real concern. One major concern however, was that the recent rally was not accompanied by a significant increase in volume that provides insight into the strength of the move. As the fuel that drives markets higher, continually rising volume is essential in a rally otherwise it is usually doomed to be short-lived. Dow Theory states that to confirm market trend both the Dow Industrial Average and the Dow Transports Average must be trending in the same direction. When Transports broke out of their downtrend in the third week of March while the Industrials continued lower, it put the bear trend in question. This bullish chart pattern was one sign that the downtrend may be in the process of changing at least temporarily. So is this a sign that the bottom the media has been touting is finally here? Markets still have a way to go to confirm the uptrend according to Dow Theory which requires that Transports and Industrials both put in new highs. But while that still may be a while away, it is a signal that must be watched and unless volume begins to pick up in earnest, this could prove to be just one more bull trap in an overriding bear market. Stories of interest this week… ECB, BoE May Support Fed as Ammunition Runs Low Did Economy Really Escape Fourth Quarter Drop? MBIA Loses AAA Insurer Rating From Fitch Some homes worth less than their copper pipes Buy commodities to hedge against inflation, study says ---------------------------------------------------------------------------------------------------------------------- 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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