| TSG Weekly Market Watch June 20, 2008 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Saturday, 21 June 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending June 20, 2008Topics Discussed This Week: * Stocks tumble… * As the leaders register gains * Housing starts and permits still falling * Dow head & shoulders trouble * Leading industries – still no sign of recovery * Technicals rule but do fundamentals matter anymore?
Last Week
Stocks tumble Blue chip stocks fell every day but one this week as stubbornly high crude prices helped pull the Dow below 12,000 for its first weekly close below that psychologically important level since March 14. The good news is that after putting in a high north of $140/bbl on Monday crude had slipped to below $135 by Friday. But there was more bad news for banks as the credit crisis continued to grow long and increasingly sticky legs. While large international banks have the resources to better weather the storm, regional banks have more finite resources. As home prices continue to fall and mortgage defaults rise, it is only a matter of time before we start to see bankruptcies. Technically Speaking Leaders higher again This week Dan Zanger’s 13 stocks in his Sunday picks included Apple (AAPL), Research in Motion (RIMM), Agrium (AGU), Potash (POT), Mosaic (MOS), Monsanto (MON), Massey Energy (MEE), Energy ConvDev (ENER), CF Industries (CF), First Solar (FSLR) and Fluor Corporation (FLR). Also back on the list were Google (GOOG) and Goldman Sachs (GS). Gone were last week’s pix MasterCard (MA), Amazon (AMZN), Peabody Energy (BTU) and Chemical & Mining (SQM). After gaining nearly 3% last week, Dan’s pix added 1.4% this week compared to a loss for the major indexes save the Transports. That both Dan’s leading stocks and the Dow Transports made gains has mildly bullish implications for stocks next week. Emerging markets, which until recently have been the principle drivers of global stock markets and economies, continue to struggle.
Figure 1 –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. This week volumes on the NYSE, Dow Industrials, Dow Transports and Nasdaq were again below average suggesting that many investors prefer to sit on the sidelines. In a downtrend this is mildly bullish as it shows a lack of commitment from sellers. But rallies occurring without strong volume are equally anemic since it demonstrates a lack of commitment from buyers. The big difference is that stocks can fall of their own weight but need steadily increasing volume to drive them higher. Another bullish sign this week came as volatility remained muted while stocks fell. The Market Volatility Index (VIX) rose to 22.87, up marginally from 21.22 last week. This compares to a high north of 31 when the Dow last bottomed during the week of March 14. This shows that fear has so far remained muted over this last correction. Meanwhile, the 17 commodities that make up the NYFE CRB Index gained more ground closing the week at 585.57 up from 571.90 last week and 541.30 three weeks ago. Thanks to increasing inflation pressure, gold gained this week to close at $903.60 up from $873.40/oz last week and $891.71/oz three weeks ago. The strong seasonal period for gold is effectively over for now but the end of July to the end of September has also been a good time to own gold. But after showing strength, the dollar had a tough week as the U.S. Dollar Index closed the week at 73.09 from 74.46 last week and 72.86 three weeks ago. While still well off the multi-year weekly low of 71.76 and the chart looks to have put in a bottom, the greenback may have a tough time going forward as central banks, including the European Central Bank, struggle to contain inflation with higher rates. This will put increasing pressure on the mild-handed Ben Bernanke to follow suit. After closing just below $140/bbl last week, the cost of a barrel of NYMEX crude oil contract moved above that level Monday before ending the week at $134.71. It was up slightly from last week’s close of $134.40 but well off the high. It was the sixteenth consecutive week that oil has remained above $100. The bad news for consumers is that the oil chart still shows a bullish flag pattern which often portends higher prices. As well, the world continues to consume around 800,000 barrels more oil per day than is produced even as economies cool and in spite of the fact that oil prices are up nearly 700% from 2002. 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) was pretty much steady at 2.8% (from 2.81% last week and 2.68% three weeks ago). LIBOR is the benchmark for $900 billion in subprime mortgage loans which typically adjust to it every six months. 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 strengthened again to 6.42% (from 6.32% last week and 5.98% three weeks ago) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) rate moved up again to 5.19% (from 5.09% last week and 5.06% two weeks ago). 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 With just two weeks left in Q1-08 reporting season and with 4126 companies having reported ( 4112 last week), earnings improved a notch to -28% (from -29% last week) versus to the same quarter last year. Unfortunately, this slight improvement means little other than the fact that reporting stragglers have had earnings deteriorate slightly less than their mid-season counterparts. 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.
Figure 2 – Chart showing changes to quarterly corporate earnings for the more than 4000 companies tracked by the Wall Street Journal. The (black) trend line says it all. Economic Reports
Chart 1 – This week we learned that the National Association of Home Builders housing market index which surveys builders on the health of their industry in three different areas dropped back to 18 again in June – the level first hit in December.
Chart 2 – We also learned that while housing starts enjoyed a brief jump of 8.2% in April, they were negative again in May with a monthly drop of 3.3%. Meanwhile housing permits which lead starts dropped 1.3%. On a year-over-year basis, starts are down 32% and permits down 31%. As we see, the chart says it all with no signs yet of a bottom.
Chart 3 – After dropping $48.7 billion in March, the net capital U.S. Treasuries flows rebounded in April jumping $60.6 billion. Based on the most recent data, the government needs to raise slightly more than $30 billion every month to cover the spending deficit (yellow dashed line). As we see from the trendline, the net long-term flow of funds into Treasuries has been falling and when the supply falls below demand, it will put upward pressure on interest rates – a trend that will be exacerbated by the rising inflationary pressure we are now experiencing. This would be an unwelcome development given the weakening economy and spike in foreclosures. Next Week Here are the reports we’ll be watching next week. The ones emboldened are leading or useful indicators, the others have the potential to impact markets short-term. - Tuesday, S&P/Case Shiller Home Price Index (previous -14.1%). - Wednesday, May Durable Goods (previous -0.6%), May New Home Sales (previous 3.3%). - Thursday, Q1-08 Final GDP (previous 0.9%), May Existing Home Sales (previous -1.0%). - Friday, May Personal Income (previous 0.2%), May Personal Spending (previous 0.2%), June Reuters/U Mich Consumer Sentiment Index. Synopsis Technicals taking over? It was another tough week for stocks but more importantly perhaps are the key levels that are being broken and tested this week. This is how Chris Johnson, president of Johnson Research Group put it in Wednesday’s Wall Street Journal. "Right now, the market really is a pinball bouncing between these technical levels," for the Dow, said Chris Johnson in Cincinnati. "And that's not a bad approach for people to take. With the fundamentals so unclear, it makes sense to turn attention to the technicals." And the Dow Industrial Average broke the 12,000 level again this week and in the process looks to be challenging neckline support of a bearish head & shoulders top pattern (see Figure 2). What does it mean? As Johnson alluded, while technicals have become more important and fundamentals may not seem as important these days, a deteriorating economy and breaking of asset bubbles are the reasons that markets have been so vulnerable. But given that stocks generally recover in anticipation of an improvement in economic conditions, they show little signs yet that the worst is over. And as we have often said in the past, with the best time to be in the market, namely the two years before each election, drawing to a close we expect markets to get worse before they get better.
Figure 3 – Weekly chart of the Dow Jones Industrial Average showing the index touching its head & shoulder top pattern neckline. If the purple line is decisively broken, it has bearish implications for the Dow given that the pattern has a minimum projected target below 10,000. Chart by GenesisFT.com The next chart shows how the industries that have typically lead in a recession have performed over the last 18 months.
Figure 4 – Industry stock performance chart of five major industries over the last 18 months and as you can see, there are scant signs of improvement yet. As a group the least negatively impacted, investment banks have fallen 29% but regional banks (not shown) are down 46% and mortgage services (not shown) down a whopping 67% over the same period. Auto & truck manufacturers, building (residential/commercial), building (mobile/RV/manufacturers) and retail (department stores) are down 32%, 37%, 42% and 51% respectively in the last year and a half. Chart by www.VectorVest.com Given that markets are increasingly technically driven, stocks are getting oversold and it is at times like these when sentiment is negative that any good news can instigate big rallies so caution is advised. As you can see from Figure 2, the Dow has experienced almost weekly flip-flops from down to up and back down again. This is true for the other major indexes as well. Stories of interest this week… Late breaking news.. RBS issues global stock and credit crash alert Dollar Heads for Biggest Weekly Drop Since March on Fed Outlook Fifth Third, SunTrust Lead U.S. Banks to Worst Month in Decade Housing starts in May hit 1991 low U.S. Economy: Housing, Prices, Output Point to Some Stagflation IMF Raises U.S. 2009 Forecast, Says Fed May Have to Raise Rates `Quickly' Gazprom CEO's $250 Oil Forecast Is Doom Traders Love Hong Kong's Underlying Inflation May Double, Central Bank Says Mexico Central Bank Raises Rates to 7.75% Iran Would Respond to Attack With `Heavy Blow'(another reason for high oil) ---------------------------------------------------------------------------------------------------------------------- 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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