| TSG Weekly Market Watch November 14, 2008 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Saturday, 15 November 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending November 14, 2008Topics Discussed This Week:
At support, but for how long? Leaders fall again in volatile week… Q3 earnings – still tanking Import prices, retail sales and trade deficit drop Base-building continues, so what's next? Is it time to buy Chinese stocks again?
Last week…
Quote of the week "Deficit spending and monetary expansion are supposed to boost demand, but people spend less in a financial panic, rendering increased public expenditures rather ineffective. We learned the limitation of Keynesianism in the 1970s. In recent decades, some former communist and Latin American countries have shown how the expansion of public expenditure beyond the permissible can lead to state default." Anders Aslund (See article "It Can be Worse that the Great Depression.." below). Support still holding but what’s next? It was another extremely volatile week as see from Figure 1 as stocks and indexes continued to experience wild daily swings in excess of 5%. We discuss what this means for the market in our Synopsis (below). Technically Speaking Leaders still down After falling 9% last week, Dan’s Sunday pix again fell this week, losing another 7% along with the rest of the market. As we can see from the next chart, it was a volatile week indeed. This week Zanger’s list of 11 stocks was nearly completely revamped from last week and included CF Industries (CF), EOG Resources (EOG), Holder Oil Services (OIH), Apollo Group (APOL), Bunge Ltd. (BG), Energy ConvDev (ENER), Fuel Systems (FSYS), iShares FTSE China (FXI), Google (GOOG), Myriad Genetic (MYGN), and Schlumberger (SLB). Google was back on the list this week and is now in the sixth week of sitting below a bearish head & shoulders neckline with a slight downward slope at around $400 with far left shoulder starting in late 2006. If the neckline (resistance) holds, the minimum projected target for GOOG is around $100 so even though the stock may look bullish short-term, definitely looks bearish longer-term. GOOG closed at $310.02 Friday. Apple (AAPL) is also flashing a very bearish double top chart pattern on the weekly chart with a minimum projected target of $40! AAPL closed at $90.24 Friday and is currently in the process of forming a bearish descending triangle chart pattern with support around $85.00. But as a group, many of Dan’s picks also look to be building basing patterns which may indicate a foundation from which to rally in the days or weeks ahead as market surge from oversold positions (see Synopsis).
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 for the major indexes rose marginally this week to about average as we finished the fifth week of a shakeout. So far, 8000 has acted like concrete support for the Dow over that time and no matter how bearish the news, this support has not been decisively breached. Although stocks dropped on rising volume this week, which is generally bearish, that support continues to hold is mildly bullish. Market makers will continue to shake this market out until there are no sellers left then try to run prices higher to see what selling they encounter. But any unexpected ugly surprises (like a raft of bankruptcies or bank failures) could cause investors to panic and dump stocks again. After surging to 81.65 two weeks ago the Market Volatility Index (VIX) settled to end the week at 66.31, up from 56.10 last week but still well off the high. Extreme VIX readings can often presage at least a temporary market bottom especially when it follows the high volume capitulation readings we saw October 27. After dropping to close at 365.84 last week, the 19 commodity NYFE CRB Index slipped again to close at 357.92 this week. Like a number of stocks, commodities look to be trying to build a base. Since hitting a high of 611.51 three months ago, the CRB Index is still down more than 40% and volatility has remained high. Gold continues to remain range-bound as the yellow metal gained a little to close at $742.70/oz. up from $733.90 last week and 719.30 two weeks ago. A major reason for this weakness continues to be the strength in the U.S. dollar. And speaking of the dollar, the U.S. Dollar Index continued to enjoy its rally based on what I consider to be false assurances (from government) and the misguided belief that it offers sound respite from the global meltdown amid efforts by the Fed and Treasury to drown the global malaise with a never-ending supply of cash. The index surged to 87.39 this week, up from 86.11 last week. But this combined with weakening demand continues to drive the price of oil down as a barrel of crude closed the week at $57.11 down from $62.20/bbl. last week and $67.48 two weeks ago. Oil is now down more than 60% from its mid-July high. This has been the most volatile year for crude in nearly two decades when it dropped from a high of $40.10 to a low $17.61 between September 1990 and February 1991. The U.S. bank prime rate and the Fed funds target rate held at 4.0% and 1.0% respectively but the effective Fed funds rate rose marginally again to 0.42% from 0.37% last week and 0.24% two weeks ago as the Fed continued to pump cash into the market. Credit markets continued to loosen this week as the 3-month London Interbank Offered Rate (LIBOR) slipped again to 2.23625% from 2.29% last week and 3.516% three weeks ago. The Freddie Mac mortgage rates slipped again to 6.14% (from 6.20% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) firmed to 5.33% (from 5.25% 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. About 6 million U.S. mortgages, including the vast majority of subprime home loans as well as 41% of prime ARMs are linked to LIBOR. Earnings Earnings still tanking In the sixth week of Q3-08 reporting season with a total of 3366 companies having reported (up from 2618 companies last week), average earnings fell to -47% (down from -38% last week, -42% two weeks ago and well down from -13% in the season opener six weeks ago) versus Q3-07. This compares to a year-over-year 36% drop in Q2-08 earnings, a 30% decline for Q1-08, a fall of 57% for Q4-07, a 21% drop for Q3-07 and a 13% jump for Q2-07. Q3-08 also marks the fifth quarter that earnings have deteriorated as the season matured.
Figure 2 – Anyone who says earnings are improving isn’t looking at the bigger picture. With 3366 companies now having reported Q3-08 earnings, average earnings are now down 47% from the same quarter last year. And earnings in Q3-07 were no screaming hell: they fell 21% from Q3-06. In other words, average earnings are down more than two-thirds from Q3-06… We have found that results from a broad range of companies are much more reliable than analysts’ earnings forecasts, S&P500 earnings, earnings surprises and month-to-month changes in seeing the true earnings picture. When earnings are falling for the broad range of companies, it’s a negative indicator of market and economic strength. When they hit a solid bottom and start to rise, it’s very good for both. Economic Reports Import prices, retail sales and trade deficit drop Not a lot worth tracking this week in the economic reports front, just more of what we already knew – the global economy continues to deteriorate. The U.S. trade balance got a little better as the September deficit shrunk to $56.47 billion from $59.1 billion in August. More importantly import prices dropped 4.7% in October compared to a 3% drop in September. However, take out oil and the drop was a much more modest 0.9% but the decline highlights weakening consumer demand. If there is a positive, the $700 billion that T. Boone Pickens estimated the U.S. was shipping overseas for oil at $100/barrel is now ‘just’ $420 billion a year if prices stay around $60/bbl. Retail sales also fell 2.8% in October while retail sales ex-autos fell 0.5% (versus -1.2% and -0.6% respectively in September). We anxiously await net U.S. Treasury international capital figures November 18 to see how willing foreigners still are to support our profligate spending and bailout ways.
Base-building continues but what’s next? Last week we discussed the Vanguard total market ETF (VTI). It is a good proxy for U.S. stocks and includes nearly 3500 U.S. stocks with a market cap of nearly $30 billion (September 30, 2008) compared to 500 stocks for the S&P500 and just 30 in the Dow Jones Industrial Average. The selling climax that occurred during the week of October 10 shows that retail investors (weak hands) were selling but the fact that the price has not dropped below the October 10 lows in subsequent weeks indicates that someone must be buying the lows. A further bullish sign is that prices rose on low to moderate which indicates a lack of selling. This was followed by a bearish top reversal pattern during the week of Oct 24 showing that the pros were again testing the market to see how many ‘weak hands’ they could scare into selling their stock. But again major support held During the week of October 31, the VTI rallied to close near the weekly high on rising volume which is bullish and shows accumulation. This was followed by another test in which price moved higher but then closed well off the weekly high. This week, we see that the price was pushed down below $40.50 support but then immediately bounced back on even higher volume indicating another shakeout. As long as the professional traders and money managers can ‘scare’ the weak hands into dumping their shares through violent price swings, they will do so until they have accumulated enough stock. Then and only then will prices begin to rise but will only do so as long as the buying continues. Another caveat is that smart money indicators tend to be short-term as we see from the chart below.
Figure 2 – Weekly chart of the Vanguard Total Market ETF (VTI) showing prior bearish patterns, first a bear pennant followed by the bear flag, both of which formed on declining volume. The latest pattern looks to be a bearish descending triangle but note the key difference. Such patterns generally are accompanied by falling volume but volume has risen sharply during the formation of the triangle pattern. Also note that support at $40.50 has been solid. Put it all together and it looks like professional accumulation – pros or strong hands look to be buying anytime retail investors (weak hands) sell the stock. This is potentially bullish. Chart by TradeGuider.com Data by RealTimeData.com According to Gavin Holmes, trader and CEO of TradeGuider.com, the current high volume on these down bars (weeks) will need to be tested. This can takes weeks or even months and will result in prices appearing to “churn” (move sideways) while this takes place. “If we continue to test and hold the $40.50 [support] area on VTI this would be a bullish sign. We then wait for an uptrend to show itself before we rush in and buy (especially when a bear trend is firmly established),” he said. But a break of $40.50 support, especially given the descending triangle pattern forming on rising volume has ominous implications. Descending triangle patterns with rising volume are rare – this occurs in only one of five patterns according to Tom Bulkowski, author of Encyclopedia of Chart Patterns (Wiley). And if we do get a rally, it could be short-lived based on his research. “Triangles following the market trend (bull market, upward breakout and bear market, downward breakout) do better when volume trends higher throughout the triangle. The countertrend triangles do better with receding volume trends,” Bulkowski explained in a Saturday (November 15) email. “Since this is a bear market and if the breakout is downward, look for a larger decline than would occur otherwise. If the breakout is upward, expect the rise to be less than it would be in a bull market. The numbers prove that this is how things work -- at least for this chart pattern.” In other words, we are still in a bear market and any rally will be countertrend and probably abbreviated. Calls that we are at a bottom are at best extremely premature. This continues to be a trader’s market where tight stops and quick reactions are essential – certainly not the kind of market for a buy & hold investment approach. On November 17, Bespoke Investment Group sent out a chart of the Shanghai Shenzen Composite Index showing that it had recently shot up above both its 50-day simple moving average and the top line of its negatively sloping trend channel. The last time it was above both was in January. Could this be a signal to start buying Chinese stocks? In the last year, the Shanghai index has dropped more than 70% so certainly a bounce would be expected. One way to play China for those on this side of the Pacific is to buy the iShares FTSE/China ETF symbol FXI.
Daily chart of the FXI showing the bearish flag chart pattern. Chart by TradeGuider.com Data by RealTimeData.com
Weekly chart of the FXI showing the bearish flag chart pattern. Chart by TradeGuider.com Data by RealTimeData.com While going long now would be premature, the bear flag might last for days and even weeks, especially if stocks rally in major stock markets around the world. Stories of interest this week… The End (of Wall Street…) It Can Be Worse than the Great Depression http://www.rgemonitor.com/globalmacro-monitor/254293/it_can_be_worse_than_the_great_depression High-Yield Default Rate to More Than Triple in a Year http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aqN1boE15SQQ Treasury Approving Capital Injections for 20 Banks http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aP62R8l.oPcw Fed Defies Transparency Aim in Refusal to Disclose http://www.bloomberg.com/apps/news?pid=20601087&sid=aatlky_cH.tY&refer=home Bailout Fund Needs Money http://blogs.wsj.com/marketbeat/2008/11/10/bailout-fund-needs-money/ Congress Pressures Banks to Lend http://www.bloomberg.com/apps/news?pid=20601110&sid=aBCAlF_ZygQA Obama's Tax Planning Needs New View of New Deal: Amity Shlaes http://www.bloomberg.com/apps/news?pid=20601110&sid=axDkSme2k8AQ Paulson Shifts Focus of Rescue to Consumer Lending http://www.bloomberg.com/apps/news?pid=20601087&sid=aU8ijqyX6ZO8&refer=home High-Yield Default Rate to More Than Triple in a Year http://www.bloomberg.com/apps/news?pid=20601110&sid=a5pJTQ4Z6w90 Credit Swap Clearinghouse to Be Running by Year-End http://www.bloomberg.com/apps/news?pid=20601087&sid=a8ZteOko.5KI&refer=home Euro Area Suffers First Recession; `Worst' May Follow http://www.bloomberg.com/apps/news?pid=20601110&sid=a1L1PCf2mE_E Home values drop for 7th straight quarter http://www.reuters.com/article/topNews/idUSTRE4A659S20081112?feedType=nl&feedName=ustopnewsearly Problems accelerate in Iceland http://www.bloomberg.com/apps/news?pid=newsarchive&sid=asLaQvoKH9Ec More on the chart patterns http://thepatternsite.com/dt.html (descending triangles) http://thepatternsite.com/voltrend.html (volume trend) --------------------------------------------------------------------------------------------------------------------- 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 have it sent to them each week). DisclaimerTradeSystemGuru.com obtains information from sources deemed to be reliable; |
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