| TSG Weekly Market Watch April 18, 2008 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Saturday, 19 April 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending April 18, 2008Topics Discussed This Week:Stocks rebound on earnings hopes This week…
Last week…
Quote of the week – “Subprime was just a paradigm for the credit markets overall. Now in the corporate market, the shoe is just beginning to fall, and we're poised for a major correction that has been coming for at least a decade.” Anders Maxwell, managing director of investment bank Peter J. Solomon Co., speaking at a conference on distressed investing in New York (see article “Bankruptcies” below). Stocks rebound on earnings hopes Stocks posted their biggest gains since February, mostly on some positive (more accurately not as bad as expected) earnings news as the major indexes edged closer to new highs. But it was clear from the reaction to earnings this week that the market is again anticipating that the worst is over for everything from earnings headwinds to credit problems. This was clearly evident by the fact that transport and tech stock led the pack, which is generally the case early in rallies driven by hopes for an economic recovery. That transports continue to be so strong in the face of oil continually makes new highs is interesting. It suggests that either investors are expecting energy prices to drop or that economic growth will not be slowed by rising oil prices. Monday – Markets started in the red with the Dow dropping 23 points on higher oil prices and lower earning as Wachovia and that the company would have to sell shares to raise capital. Tuesday – But then optimism buoyed again with the Dow adding 60 points on hopes that better earnings were in the wind – the gains coming in spite of the fact that crude hit another new high of $113.79/bbl. (Gee, I wonder if a few investors got wind of the JP Morgan news the next day?) Wednesday – The big Dow rebound of 257 points could be characterized as a collective sigh of investor relief – relief that JP Morgan earnings weren’t a lot worse causing that stock to jump nearly 7% dragging Bank of America and Citigroup share prices higher in the process. But there was also strength in the tech sector as Intel forecast healthy demand for its chips and better margins. Thursday – This was basically a rest day after the big rise in stocks Wednesday concerns were raised in the media that credit problems weren’t over. Friday – But unlike last week in which the Dow lost 257 points, this Friday optimism bubbled to the surface on positive comments from bellwether Caterpillar on the strength of the global economy that renewed hopes (again) that markets were decoupling from the U.S. (yeah right). When Citigroup’s earnings weren’t as horrid as they could have been (only a $5.1 billion quarterly loss and booking another $13 billion in write-offs), investors cheered. Honeywell, like Caterpillar which earns substantial revenues overseas and therefore in other currencies, also reported higher than expected earnings. As well Google beat expectations reporting a 31% increase in Q1 earnings giving investors one more reason to hope that maybe the economic downturn would not be as bad as originally anticipated. On the day, the Dow jumped 229 points. Technically Speaking Leaders unexpectedly surge
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. On Sunday April 13, Dan highlighted a number of stocks including a number of gold companies with bearish chart patterns that were potential shorts when they broke support. But then optimism blossomed and we had two 200+ point days on the Dow.
Dan’s amazing ability to pick high-alpha stocks is clearly evidenced by the performance of his choices this week. Even though they were short candidates, they rallied nearly twice as much as the indexes when the market took off. In Dan’s 13 Sunday picks this week, gone were the oils and oil service companies but Intuitive Surgical (ISRG), Apple (AAPL), Baidu.com (BIDU), Google (GOOG), Mosaic (MOS) and Potash (POT) as well as solar winners First Solar (FSLR) and SunPower (SPWR) were on the list. Gold and mining stocks showing weakness included Newmont Mining (NEM), Goldcorp (GG) and Southern Copper (PCU) were on it as was Compania de Minas (BVN). After five weeks of falling, volumes on the NYSE and Nasdaq rose this week but still remain below the 50-week moving average. This shows that while stock rallied, many buyers are still sitting on the sidelines. Meanwhile, the MSCI Emerging Markets ETF (EEM) reversed direction this week to close at 145.56 from 139.34 last week in spite of the weakness in Chinese stocks. Volatility remained contained this week as the Market Volatility Index (VIX) slipped to 20.13 this week down from 23.46 last week and 22.45 two weeks ago as more fear seeped out of the market. The 17 commodities that make up the NYFE CRB Index continued to rise ending the week at 550.01 up from 537.81 last week and 527.22 two weeks ago for the fourth consecutive weekly close above its upper 2 standard deviation trend channel. Gold has spent the last four weeks bounded in a bearish looking flag pattern that could portend lower prices ahead. It closed at $915.20/oz down from $927.60 last week for the 100oz continuous contract and down from $917.90 two weeks ago. Gold remains in still in its strong seasonal performance period between the end of January and end of June. Interesting action on the dollar Friday as the U.S. Dollar Index surged to a high of 74.50 before settling to close at 72.12 up from 71.80 last week and 72.02 two weeks ago. The dollar has experienced its largest capitulation (volume and volatility) spike in the last month in its history (we have data back to 1986). Technically, this often warns that a bottom is near which may explain the weak chart patterns in gold and gold stocks. The NYMEX crude oil continuous contract has now been above $100 for eight consecutive weeks as it surged to close at $116.45/bbl up from $109.90 last week and $104.90 two weeks ago. This week the Fed funds target rate held at 2.25% and the U.S. bank prime at 5.25%. The 3-month London Interbank Offered Rate (LIBOR) rose to 2.9075% (from 2.7131% last week and 2.6975% three weeks ago) showing that commercial credit markets remain tight. Freddie Mac mortgage rates held steady again at 5.88% from last week (and from 6.13% four weeks ago) for the 30-year fixed mortgage while the rate slid to 5.1% (from 5.18% last week and 5.24% three weeks ago) for the-year adjustable rate (ARM). So far, all the liquidity being pumping into financial markets has yet to filter down into lower mortgage and credit costs for the public. Earnings A few stars but majority still weakening There may have been a few positive earnings surprises to get investors excited this week but overall, Q1-08 earnings continued to trend lower. According to Bloomberg, profit exceeded analysts' estimates at 58 of 101 companies in the S&P 500 that have released first-quarter results so far this earning season and this is what has excited investors. But earnings fell an average 37% from a year earlier. S&P500 Q1-08 earnings are forecast to decline 13.7%, which if it comes to pass would make it the third straight quarterly decrease. Looking at the broader picture, as of the second week of Q1-08 reporting season a total of 678 companies have now reported and average earnings fell 22% from the same quarter a year ago compared to a drop of 17% last week with 421 companies having reported. This compares to a drop of 57% for Q4-07 (3900 companies), a 21% drop (4205 companies) for Q3-07 reporting season and a 13% jump in Q2-07 (4211 companies). (Is it a coincidence that the total number of companies has dropped each quarter?) Economic Reports No point in discussing CPI or PPI, as it would be a waste of time from a trading/investing perspective. In my opinion, other than the occasional dramatic difference versus expectations that can exert a short-term impact on markets, both can be ignored. Ditto for Personal Consumption Expenditures (PCE). The Conference Board’s leading economic indicator is at best coincident and has no value as a leading indicator. It is worth mentioning that the Fed’s Beige Book discussed the slowing economy, finally but such a revelation only confirms what we already know and is about six months too late to be of any use to traders or investors. Further confirmation that things are getting tougher in the mid-west came in the form of a -24.9 reading for Philadelphia Fed Business Index in April. It was the fifth consecutive monthly decline. A number below zero indicates contraction. Here are the charts we are following. Housing stays in the basement
Chart 1 – On Tuesday, we learned that homebuilders remain depressed about the state of their industry in the April National Association of Home Builders survey for April as the overall reading held steady at 20 for the third consecutive month. Guess you could say they have hit bottom except that at these levels, there isn’t much more downside possible.
Chart 2 – We also learned on Tuesday that Net U.S. Treasury capital inflows increased to $64.1 billion in February from a revised $35.7 billion in January. The black trendline shows that inflows continue to trend lower which could become a problem. This year, the budget deficit is projected to total $410 billion which means at least $34.2 billion in Treasuries must be sold each month (yellow dashed line) to cover the shortfall.
Chart 3 – The headline housing starts number for March showed a bigger than expected drop of 11.91%, nearly double the expected drop of 6.5%. That shows that builders are opting to begin less homes, a prudent strategy. However, permits dropped 5.8% which was less than February’s 7.3% drop but still sizeable none-the-less. Again, no sign of a bottom anywhere on the horizon in this housing market leading indicator. Next Week A slow week coming up for economic reports, which is fine given that we are in the thick of earnings reporting. - Wednesday, March Existing Home Sales (previous 2.9%). - March Durable Goods Orders (previous -1.1%), March New Home Sales (previous - 1.8%). Perspective from Japan… I know, I know. Constantly harping on the fact that calls for a stock market bottom are vacantly optimistic gets a little tiring after a while. My reason for caution is that such self-serving calls from pundits are all-too common in bear markets as we see from Figure 2. How are they self-serving? It is the job of those working for investment firms (who regularly appear on financial TV) to sell stocks and that task becomes infinitely more challenging when markets turn sour and investors stop buying. So what do these master marketers do? They don their rose-colored glasses and encourage us to see things from a ‘don’t worry, be happy and buy’ perspective. But falling prey to this Wall Street-generated logic can be downright dangerous. In the wake of its parabolic blow-off peak in January 1990 near 40,000, the index fell to new multi-year lows following each of the six major Nikkei 225 Index rallies over the last 18 (!) years. These rallies were no doubt fueled by bullish comments and forecasts by market pundits who confidently declared an end to the bear market. But as you can see from the chart, even after the 100% rally from 2003 through 2007, the index is still down more than 80% from its 1990 highs.
Figure 2 – Monthly chart of the Nikkei 225 Index showing the 18-year bear market in that country. More important is the bear market perspective on the six rallies that occurred over the 18 year bear market. Chart by Metastock.com This week the market generated another long signal but if it’s like those in the past four months, it will likely be short-lived if there are more credit and earnings challenges ahead. If you are a short-term trader or investor and want to go long be sure you have your stops set tight just in case the market turns downright ornery again. And as soon as the long-term picture changes, we’ll let you know. Housing markets cooling around the globe For those of you following the real estate market, be sure to read the articles below about the U.K. and Canadian markets. If we have learned anything from the U.S. experience, as the series of bubbles around the globe break, those in affected markets should be ready for the economic tsunami that eventually ensues. Stories of interest this week… U.S. Stocks Advance on Earnings (Friday) Bankruptcies Rise for Firms `That Should Have Failed' U.S. foreclosures jump 57% Vacant Homes in U.K. Prove Speculator Nightmare as Losses Mount Canada's housing boom is 'officially over' Let Britain’s housing bubble burst –Martin Wolf Growth of world trade drops sharply Citigroup May Need to Sell Assets to Bolster Capital Wachovia Posts Loss, Plans $7 Billion Capital Raising Credit Crisis Will Weigh on Markets for a Decade, JPMorgan Says Kaufman says Fed failed as regulator Australian Central Bank Says Rate Is Major Restraint Merrill Posts Loss on Mortgage Writedowns, Cuts Jobs JP Morgan Raises $6 Billion in Hybrid Securities Sale FBI's Mueller Says Subprime Fraud Probe May Lead to Hedge Funds Google Profit Climbs 30% on International Expansion ---------------------------------------------------------------------------------------------------------------------- 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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