| TSG Weekly Market Watch August 8, 2008 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Saturday, 09 August 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending August 8, 2008Topics Discussed This Week:
Rally on…again Leaders swing low Earnings falling again Service sector falling faster than manufacturing But consumers still borrowing Popping commodity bubble continues to lift stocks Special Report: Solving the Energy Puzzle, Challenges & Opportunities Part 1
Last Week
Quotes of the week “The money markets have ceased to function as they should, as nothing has been resolved with regards to the lack of trust between banks. This is why you're seeing such demand for central bank money 12 months on from the start of the crunch. These measures were only supposed to be temporary, and they're looking increasingly permanent.” Marius Daheim senior bond strategist in Munich at Bayerische Landesbank, Germany's second-biggest state-owned bank. Rally on … again This week the see-sawing continued except the final tally was positive thanks in large part to declining commodity, especially oil making it the best weeks for stocks since April. But the 331-point Dow Tuesday on the Fed’s decision to hold pat on interest rates was misguided – they held pat because the economy is too weak to take the strain of a rate rise. And then there was more bad earnings news. That investors are betting on a bottom while ignoring the torpedoes was obvious by the more than 300-point rally Friday by the nearly $5 drop in oil. However, there is no ignoring the fact that techs and transports were up strongly and that is a positive sign. But how long will it continue? Technically Speaking Leaders drop while large caps rise Although stocks rose to the occasion this week, Dan Zanger’s last Sunday pix didn’t join the party. His list totaled 15 stocks that included Research in Motion (RIMM), Potash (POT), Energy Conv (ENER), Apple (AAPL), First Solar (FSLR), Baidu.com (BIDU), VisionChina (VISN), Flowserve Corp (FLS), Continental Airlines (CAL), CF Industries (CF), Sohu.com (SOHU), Massey Energy (MEE), Delta Airlines (DAL), Union Pacific (UNP) and Goldman Sachs (GS). Zanger’s Sunday pix dropped 3% two weeks ago but led the rest of the indexes last week. This week, however, they again led to the downside losing more than 6% compared to a gain for the Dow Transports of more than 5%. But as we see, the Emerging Markets ETF (EEM) also took a hit increasing the chances that this week’s up-move in stocks was more of a bounce in large caps than a sustained broad market rally and demonstrated the level of uncertainty in the market.
Figure 1 –Five-day performance of Zanger’s last Sunday pix (green) compared to the S&P500 (SPX), the Dow Jones Industrial Average (DJX), Dow Transports (DTX), Nasdaq Composite (IXIC), Russell 2000 (RUT) and MSCI Emerging Market ETF (EEM). Data courtesy of The Zanger Report, performance chart courtesy of VectorVest.com. Weekly volumes on the NYSE, Dow Industrials, Dow Transports and NYSE Index were again below average this week which is bearish since it shows a lack of commitment from buyers. Nasdaq Composite volume was more positive and showed that buyers were indeed participating The NYSE Index has now spent the last five weeks below the critical head & shoulders neckline resistance level while the Dow Industrials have been below its H&S neckline for seven weeks now. Falling volume during rallies is decidedly bearish and shows that fewer buyers are joining the rally. Stocks can fall of their own weight but need steadily increasing volume to drive them higher. That volume increases on down days is bearish as it signals that sellers in control. Meanwhile, after spiking to 27.49 five weeks ago, the Market Volatility Index (VIX) settled down for a fourth week to 20.66 (from 22.57 last week) dropping further below the 52-week moving average. This compares to a VIX north of 31 when the Dow last bottomed during the week of March 14 and shows that fear is subsiding. But after hitting a high of 611.51 five weeks ago the 19 commodities that make up the NYFE CRB Index resumed its fall to close at 510.68 (from 546.67 last week). Moving in the opposite direction of stock indexes, the CRB Index shows how quickly the air continues to leak out of the commodity bubble. Gold also dropped again to close the week at $860.40/oz from $912.80 last week and $957.50 three weeks ago). Gold should have begun enjoying its strong seasonal period from the end of July to the end of September and that it isn’t speaks loudly. It was the fourth consecutive week that the U.S. Dollar Index gained, closing at 75.85 from 73.36 last week and 72.17 three weeks ago for its biggest weekly gain in years. Its daily all-time low of 71.33 was put in on April 22. And as the economy continues to weaken and an election approaches, it is looking increasingly unlikely that the Fed will raise rates to try to support it even though inflation is becoming a bigger global problem. Drops in oil and commodities have been a big plus given the economic importance they now play. As mentioned earlier, oil experienced another big drop this week as the price of a barrel of NYMEX crude oil contract fell to $115.42/bbl from $125.69 last week. This is a drop of more than 20% from the weekly high of $145.15 July 11. However, it was the twenty-third consecutive week that oil has remained above $100. Normally, oil hits a seasonal high in mid-October but like gold, seasonality appears to have given way to economic forces. The U.S. bank 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) ticked up again to 2.804% (from 2.794% last week). Freddie Mac mortgage rates held steady this week to 6.52% (from 6.63% two weeks ago) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) dropped again to 5.22% (from 5.27% last week). 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. Despite the Fed’s determined and significant efforts to flood the market with liquidity over the last nine months, lending rates remain stubbornly high. And based on the rally in bonds this week, bond investors expect further economic weakness. Earnings Earnings crater again It was a busy fifth week of Q2-08 reporting season and with a total of 2750 companies (up from 1976 last week) having reported, average earnings took a big hit dropping back to -32 % (from -22% last week) versus Q2-07, putting earnings about where they were two weeks ago. This compares to a 30% drop at the end of Q1-08 earnings season with a grand total of 4214 companies having reporting. This marks the third quarter that earnings have shown a consistent trend to drop as more companies have reported. 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 ReportsHere are the reports we were watching this week. ISM indexes still falling |
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| Last Updated ( Sunday, 17 August 2008 ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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