| TSG Weekly Market Watch May 23, 2008 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Saturday, 24 May 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending May 23, 2008Topics Discussed This Week:Stocks roll over with rising oil… As leaders suffer a worse fate Earnings still deteriorating Existing home sales drop, unsold inventories near one year Oil prices and earnings – growing economic headwinds
Last week
Stocks roll over… This week, unlike the last in which stocks were able to shrug off higher energy prices, stocks took it on the chin as oil surged again to new highs. Not surprisingly, calls that the worst is over for the economy and market were silent this week in stark contrast to last week. Technically Speaking Leaders surge This week Dan Zanger included 11 stocks in his Sunday picks including Sohu.com (SOHU), Baidu (BIDU), Apple (AAPL), Potash (POT), LDK Solar (LDK), Sundtech Pwr (STP), Excel Marine (EXM), Hess Corp (HES), Canadian Solar (CSIQ). Rensola Ltd Ads (SOL) and Dryships Inc. (DRYS). The group led the indexes to the downside this week as Dan’s Sunday pix shed more than 7% after a gain of 6.6% last week.
Over the last seven weeks volumes on the NYSE, Dow Transports and Nasdaq have remained below average and that continued again this week except that this time all indexes fell. Rallies occurring without strong volume are suspect because it means that there is a lack of commitment from buyers but a lack of volume on down weeks is mildly bullish. Another concern is on the week the major indexes put in a bearish engulfing candle (high open and low close ‘engulfs’ low open and high close of prior candle) which generally portends lower prices. Volatility reversed its trend as the Market Volatility Index (VIX) jumped this week to 19.55 from 16.47 last week back near where it was two weeks ago at 19.41. The 17 commodities that make up the NYFE CRB Index bumped higher this week to 550.91 from 548.06 last week and 554.95 two weeks ago. On a weekly basis the index remains well above the 2-standard deviation top trendline and has moved back below its mid-line channel support line on the daily chart. Gold continued to rebound this week to close at $925.80 from $900 last week and $885.90 two weeks ago, after putting in a multi-month low of $858.10 three weeks ago. Gold generally demonstrates strong seasonal performance period between the end of January and end of June, and it continues to show signs of strengthening after finding support in the mid-$800 range which is bullish. It was the third weekly fall as the U.S. Dollar Index dropped to 72.06 from 72.94 last week and 73.06 two weeks ago putting the dollar dangerously close to its lowest weekly open in years of 71.76. A drop below this level would be bearish indeed for a number of reasons – the biggest of which currently being higher oil prices. After surging above $135 on a daily basis, crude continued rallying as the NYMEX crude oil continuous contract closed the week at $131.70 up from $126.45 last week and $126.05 two weeks ago. It was the twelfth consecutive week that it remained above $100. Take a look at a chart of the price of oil going back to 1950 and you will see a classic parabolic move since 2004 on a monthly chart when prices surpassed $40/bbl for the first time in history. Prices are up more than 300% since then and crude has experienced a rate of price appreciation that is not sustainable. The U.S. prime rate held again this week at 5% and the Fed funds target rate remained at 2%. The 3-month London Interbank Offered Rate (LIBOR) slipped to 2.64563% from 2.695% last week and 2.685% two weeks ago.LIBOR is the benchmark for $900 billion in subprime mortgage loans which typically adjust to it every six months. According to data company Dealogic, corporations around the world have the interest rates on roughly $9 trillion in debt pegged to LIBOR and rates on more than $380 trillion in derivative interest rate swaps also are based on LIBOR. Freddie Mac mortgage rates remained frustratingly firm barely slipping to 5.98% from 6.01% last week and 6.05% two weeks ago for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) rate firmed up to 5.24% from 5.18% last week and 5.29% two weeks ago which it held for three weeks. With the number of mortgages resetting over the next year, stubbornly high mortgage rates will continue to exert a downward pressure on property sales (and prices). Earnings Earnings weakness continues Q1-08 earnings season ended it seventh week and with 3897 companies now having reported (3569 companies last week), earnings deteriorated again to -29% (from -28% last week and -26% two weeks ago) compared to the same quarter last year. This compares to -20% three weeks ago and -22% four weeks ago. Earnings have shown a consistent negative trend over the last two quarters to fall as more companies have reported and this is bearish. Looking at past seasons, there was a drop of 57% for final Q4-07 (3900 companies), a 21% drop (4205 companies) for Q3-07 and a 13% jump for Q2-07. Economic ReportsOn Tuesday, the April Producer Price Index (PPI) registered a disappointing rise of 0.2% compared to 1.1% in March showing the producers are less able to pass rising costs on to consumers, and we learned that existing home sales fell 1% in April compared to a 2% drop in March.
Chart 1 – Month-to-month change in existing home sales but the trendline says it all. Existing homes sales dropped another 1% in April after falling 2% in March to an annual rate of 4.89 million homes. The median price of an existing home fell to $202,300 down 8% from April 2007. On a year-over-year basis home sales are down 17.5% from last April and inventories increased to an 11.2 month supply up from a revised 10 month supply in March. Next Week Here are the reports we’ll be watching next week. - Tuesday, Q1 Case-Shiller Home Price Index (previous -8.9%), April New Home Sales (previous -8.5%). - Wednesday, April Durable Goods Orders (previous -0.3%). - Thursday, Q1-08 Preliminary GDP (previous 0.6%). - Friday, April Personal Income (previous 0.3%), April Personal Spending (previous 0.4%), May Chicago PMI (previous 48.3). Synopsis Energy burden Oil again provided the biggest challenge to stocks and the longer oil prices rise, the greater the eventual pain to the consumer and economy. But as we enter the traditional summer doldrums there is still hope that the fourth quarter will be strong thanks to the election party lift. One remaining unknown, however, is how markets will fare in the face of polls showing a growing chance that a Democrat will take the White House. This could be negatively viewed by investors especially considering that both candidates have expressed a willingness to raise taxes and attack multinationals – both of which have proven economically disastrous in the past. And earnings weakness continues to spread… Stories of interest this week… Yen Rises as Stock Decline Spurs Investors to Cut Carry Trades Shanghai Stock Index May Drop 25%, Credit Suisse Says Drop in Bank Stocks Leaves Technology Biggest S&P 500 Industry Tice Proves Every Bear Has a 9.5% Return as He Invokes `D' Word Auction-Rate Notes Leave Individuals in Yield or Cash Purgatory Trichet Says Shocks Aren't Over for Europe's Economy New mortgage crisis looms ---------------------------------------------------------------------------------------------------------------------- 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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