| TSG Weekly Market Watch July 4 , 2008 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 06 July 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending July 4, 2008Topics Discussed This Week:* Stocks decline for fourth consecutive week* As the leaders fall hard * Real estate loan defaults jump * Final earnings tally in for Q1-08 * Jobs continue to go MIA * More indexes approach or have hit key support… what next? * Canadian housing markets mirror US, but with 2-year lag? * Read our SPECIAL MID-YEAR 2008 MARKET ROUNDUP
Last Week
Quote of the week “Our currency is in what may end up being its longest bear market in over fifty years, and there is a very high likelihood that the next President of the United States will be the candidate that is perceived as the most anti-business candidate who was running. Not a pretty picture.” – Bespoke Investment Group – Halfway There: 2008 Mid-Year Report. Stocks decline for fourth week in a row With the exception of the Dow Transports that enjoyed a brief uptick two weeks ago, it has been steady declines for stocks pretty much across the board for four consecutive weeks now. Gains for the Dow in three out of four trading days didn’t save it from a loss on the week thanks to a 167 point decline Wednesday. Transports and small caps of the Russell 2000 took the biggest hits on the week. But most indexes are getting extremely oversold and as we saw Thursday with the 1.4% bounce in GM stock after a 15% drop Wednesday, even the lack of any bad news can spark a rally. Technically Speaking Leaders roll over Dan Zanger’s Sunday list was short with just 8 stocks making the cut for this holiday shortened three and a half-day week. They included Agrium (AGU), Potash (POT), Mosaic (MOS), Massey Energy (MEE), Murphy Oil, (MUR), PetroBras ADR (PBR), Hess Corp (HES), and ITT Educational (ESI). After falling nearly 4% last week, Dan’s portfolio of stocks shed another 7.6% this week which is bearish but could signal a possible capitulation ahead and bounce. The Dow Transports and emerging markets were also pretty badly mauled which is again bearish from a sector rotation standpoint in that both have generally led in rallies.
Figure 1 –Four-day (actually 3.5) performance of Zanger’s market leaders (green) 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. Weekly volumes on the NYSE, Dow Industrials, Dow Transports and Nasdaq were back below average which was not surprising given that the trading week was one and a half days short and it’s the official beginning of summer holidays. Stocks can fall of their own weight but need steadily increasing volume to drive them higher but that fact that volume is below normal on down days is bullish as it signals that sellers are running out of stock to sell. But since it was a short week, it is more difficult to gauge what is normal. What the market needs right now is a capitulation bounce which we probably haven’t seen yet. However, it is important to point out that in the generally low volume environment we see at this time of the year, players can play games and if some big players wanted to initiate a bounce, next week would be a good time to do it. Meanwhile, the Market Volatility Index (VIX) climbed again to 24.80 from 23.44 last week and from 21.22 three weeks ago. This compares to a VIX north of 31 when the Dow last bottomed during the week of March 14 and shows that fear has so far remained muted during this recent decline. Meanwhile, the 17 commodities that make up the NYFE CRB Index continued to climb closing the week at 611.51 and yet another all-time high up from 596.79 last week and 571.90 three weeks ago. The opposite of stock indexes, the CRB Index keeps getting more overbought every week supercharged by a weakening dollar. Gold continued to make gains this week to close at $935.90/oz up from $930.90 last week and $873.40 three weeks ago. The next strong seasonal period for gold (the end of July to the end of September) is quickly approaching but given the strong performance of commodities of which gold is a pivotal indicator, gold season has come early this year. Even the dollar managed to inch higher as the U.S. Dollar Index closed at 72.74 from 72.36 last week but still well off 74.46 three weeks ago. This was a surprise given the 25 basis-point rise in Euro interest rates by the ECB. 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 work to contain the growing inflation risk with higher rates. Given the weak U.S. economy, risks of the unpleasant onset of stagflation in which costs for necessities increase but wages and the economy decline are growing. We don’t expect mild-mannered Ben, who is obviously catering to the growing calls from the House, Senate and at least one presidential candidate for more bailouts for consumers, to put rates up before the election. But consumers continue to feel the pinch at the pumps. After closing just below $140/bbl two weeks ago, the cost of a barrel of NYMEX crude oil contract closed at $145.96/bbl up from $140.54 last week and $134.40 three weeks ago. It was the eighteenth consecutive week that oil has remained above $100. Oil continues its parabolic climb that will have to end one day but few have any idea, given the rapidly growing global demand for the stuff, when this reversal will come. Based on the seasonality of oil with a peak in mid-October, this rally could last until late fall. 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) held at 2.791% (from 2.8% two weeks ago). Freddie Mac mortgage rates finally eased this week to 6.35% from 6.45% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) also slipped to 5.17% (from 5.27% last week but up from 5.09% 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. Earnings Earnings results final for Q1-08 It was the last week of reporting for Q1-08 earnings season and with a grand total of 4214 companies having reported earnings fell 30% from the same quarter last year. Earnings have shown a consistent 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 ReportsReal estate and construction loan defaults skyrocket
Chart 1 – As we see here oil isn’t the only chart going parabolic. Data published by the Federal Deposit Insurance Corporation (FDIC) this week shows how dire the situation is becoming in credit markets especially for smaller banks. “According to the FDIC $45.4 billion of the $631.8 billion in construction loans outstanding at the end of the first quarter were delinquent. When banks announce second-quarter results in coming weeks, they are expected to report sharp increases in loans that builders can't repay.” – WSJ July 2. The Journal reviewed reports filed by 6,919 banks that make construction loans and found that 2,182 banks (32%) held construction loan portfolios that exceeded 100% of their total risk-based capital. Seventy three banks were found to have delinquency rates above 25%! Those with assets less than $5 billion faced the biggest problems. The chart above is a composite of all real estate and construction loans. Condo projects have the highest default rate at roughly 13%, single family is next at 11% while commercial and apartment projects had delinquency rates below 4%.
Chart 2 – The next credit shoe to drop. This FDIC chart shows that credit card charge-offs are next in line behind real estate loan defaults with other consumer loans third.
Chart 3 – Construction spending was negative again for the eighth consecutive month but the good news is that the declines are getting smaller. Now we need to see this trend continue.
Chart 4 – Chart showing the Institute of Supply Management (ISM) Manufacturing Business (blue) and ISM Non-Manufacturing or Service Indexes for June with manufacturing reading 50.2, above the expansion level for the first time in five months. Meanwhile the service index showed a decline to 48.2 which is important for two reasons. First, the more important service sector since it represents a bigger slice of our economy has shown a rapid decline in the last three years and the negative trend (red dashed line) is more steeply sloped than the manufacturing index. Second while manufacturing is showing at least a temporary bounce back, the service sector has not. As you can see the slope of the trends on both are sharply negative.
Chart 5 – It was interesting to see that the market rallied with the release of non-farms jobs data showing a loss of ‘only’ 62,000 jobs. Investors instead focused on the 1.4% technical rebound on GM shares after hitting lows not seen since 1954. Is that good news? Guess investors wanted to head into the long weekend on an up note. What few financial media outlets reported was that the Labor Department also revised the data from May to February downward resulting in the loss of another 75,000 jobs. Given that revisions can happen years later, it makes you wonder what value the metric has other than to tell us long after the fact how bad or good the situation was. For the month of June, Wednesday’s ADP employment report will probably prove closer to the mark and it reported a loss of 79,000 jobs when the revisions are finally tallied. 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, May Wholesale Trade (previous 1.3%), May Pending Home Sales (previous 6.3%), May Consumer Credit (previous $8.9 billion). - Friday, May Trade Balance (previous -$60.90 billion). Jun Import Prices (previous 2.3%). Jun Federal Budget. Synopsis Troubling technicals continue Last week we looked the Dow Jones Industrial Average as it sliced through key head & shoulders neckline support around 11,880. This week we will examine a chart of the S&P500 to see what it is doing. In the case as in most others, a picture is worth a thousand words especially when its representative of some of the other major indexes.
Figure 2 – Weekly chart of the S&P500 Index with our indicators. Chart by www.GenesisFT.com As we see from the weekly chart of the S&P500, the index has broken down out of the rally trading channel support line (dashed blue line) and now sits on the bearish head & shoulders neckline support around 1260. Also bearish is the fact that the potential positive divergence support line (green line) on the Relative Strength Index or RSI (middle subgraph) has also been broken. But the good news is that we could be nearing some sort of bounce here as shown by the Williams Capitulation Index and declining down volume (lower subgraph). However, unless we get a sustained bounce from here, a confirmation of this bearish pattern implies a minimum projected target on the SPX of 1105. There are similar patterns on the NYSE Index which is also on neckline support, the Russell 2000 which is slightly above the neckline and the NASDAQ Composite which is also above neckline support at present. We will keep you posted. Stories of interest this week… LATE BREAKING Spain, Ireland `Thrown to the Wolves' After ECB Move World needs tough monetary policy to cool inflation - BIS http://www.reuters.com/articlePrint?articleId=USLAE00016720080630 Commodities Signal Bubble Bursting as First-Half Ends http://www.bloomberg.com/apps/news?pid=20601087&sid=aMdI79jc0i9w&refer=home Japan’s Nikkei down 0.5 pct, ends worst First Half since 1995 http://www.reuters.com/article/tokyoMktRpt/idUST29500520080630?sp=true Obama May Produce $1 Trillion Deficit, Gross Says (Update1) http://www.bloomberg.com/apps/news?pid=20601087&sid=a9rnoweGGxyE&refer=home Ireland's Economy Contracts for First Time in a Decade http://www.bloomberg.com/apps/news?pid=20601068&sid=aLawDCwkASlA&refer=economy ECB's Trichet Sees Risk of `Exploding' Inflation http://www.bloomberg.com/apps/news?pid=20601068&sid=aLvLNLcHL8KQ&refer=economy Manhattan Second-Quarter Apartment Sales Fall by 22% http://www.bloomberg.com/apps/news?pid=20601110&sid=a2yxKDjy5osQ Overdue Home-Equity Credit Lines Rise Most Since 1987 http://www.bloomberg.com/apps/news?pid=20601110&sid=ar.9tnOdgE_0 Company Bankruptcies in U.S. Outpace Individual Filings in June http://www.bloomberg.com/apps/news?pid=20601110&sid=a5W2zQLF1PVc Canadian Housing Market Mirrors US, but with 2-year lag... http://www.bmonesbittburns.com/economics/amcharts/Jun2708.pdf As Banks Shun Loans, Hedge Funds Move In http://www.nytimes.com/2008/06/13/business/13hedge.html?_r=1&oref=slogin VIDEOS Roubini Forecasts `Severe' Recession - Bloomberg John Challenger Says U.S. Labor Market Is `Very Fragile' ---------------------------------------------------------------------------------------------------------------------- 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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