| TSG Weekly Market Watch November 28, 2008 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 30 November 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending November 28, 2008Topics Discussed This Week:
Is this finally it? Leaders move higher but trail the pack Q3 earnings – still diving Homes sales/prices fall, manufacturing/consumer drops Bottom watch
Last week
Quote of the week"Barack Obama and many other leading Democrats favor windfall profits tax on oil companies and anti-gouging laws. The lessons of Carter's [U.S. President from 1976-80] failures still haven't been learned." Arthur Laffer. The bounce finally comes to Wall StreetWhat a difference a week makes. We enjoyed some daylight in the midst of all the dark economic news – no the news didn’t suddenly get better, investors just stopped listening to it. Stock action this week reversed all the damage done to major indexes over the last two weeks taking prices back to where they were November 7. Among the big indexes, the S&P500 was the star, gaining 12.5% for its biggest weekly gain in 34 years according to Bloomberg. But small caps did even better with the Russell 2000 gaining more than 16% for its biggest weekly gain on record, eclipsing its previous weekly record in June 2000 by more than 50%. But are these gains sustainable? Technically SpeakingLeaders still downLast week, Dan Zanger’s Sunday pix gave us a good heads up that markets would rise as the portfolio jumped 6.1% compared to across the board losses for the major indexes. This week they trailed the pack gaining 8.3% which is mildly bearish for next week and may indicate a little weakness or at least consolidation ahead. This week Dan’s portfolio totaled 11 stocks including Exxon Mobil (XOM), China Mb ADR (CHL), Occidental Pete (OXY), EOG Resources (EOG), Devon Energy (DVN), Research in Motion (RIMM), CF Industries (CF), sTracks Gold (GLD), Anglogold ADS (AU), Agnico Eagle (AEM), and Holders Oil Services (OIH).
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 fell this week after rising well above average last week. The 8000 level for the Dow held as solid support and is now the line in the sand to watch. As long as it continues to hold, short sellers should exercise caution. That the small caps (Russell 2000) led the rally this week followed by the Dow Transports and emerging markets is also bullish but volumes for all three were substantially lower than last week and that is mildly bearish, especially given that the gains were so impressive. It shows a lack of commitment on the part of buyers. What investors do after the holiday will reveal much. Rising volumes on rising prices will indicate buyers entering the market in increasing numbers. After surging to 81.48 last week, the Market Volatility Index (VIX) spent the week dropping to close at 55.28 Friday. This should be bullish but incredible volatility may not be over yet, especially if we see stock prices drop this week again to break key support levels. After falling last week, the 19 commodity NYFE CRB Index surged to close at 361.74, up from 344.02 last week. Like a number of stocks, a bottom for commodities may be building here. But since hitting a high of 611.51 three months ago, the CRB Index is still down 41% from its peak. Gold surged again this week to close at $815/oz., up from $791.80 last week. We are clearly in a deflationary period but investors appear to still be seeking a haven in gold amid the economic turmoil even though the U.S. dollar has strengthened. Part of the reason for gold strength was the slide in the U.S. Dollar Index as it slipped to 86.52 from 87.66 last week. Since bottoming in July, the index has seen its gain pared to 20%. But a barrel of crude also firmed this week to close at $55.03 up from $50.36 last week, just above its 2007 low. Oil is now down 63% 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 held steady at 0.63% (from 0.65% last week). Credit markets have leveled off as the 3-month London Interbank Offered Rate (LIBOR) slipped to 2.21688% (from 2.477% last week). Freddie Mac mortgage rates slipped again to 5.97% (from 6.04% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) slipped to 5.18% (from 5.29% 5.33% 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. EarningsEarnings – Still divingIn the eighth week of Q3-08 reporting season with a total of 3806 companies having reported (up from 3719 companies last week), average earnings slipped further to -63% (down from -62% last week, -38% four weeks ago and -13% in the season opener) 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. This is the worst annual earnings decline since earnings began to fall out of bed last year! Economic ReportsNew and existing home sales and prices down, economic declines accelerateAlthough this week was short, it was an action-packed for economic news and most of it was bad. We learned that the housing market continues to be challenged on all fronts as existing homes sales took a 3.1% drop in October while the median existing home price fell to 4.2% month-over-month and are down 11.4% in the last year. This compared to a more than 17% drop in the Case-Shiller 20 city home price index in the last twelve months as the two indicators continued to converge. Three other indicators also took big hits this week including the October Chicago Purchasing Managers Index which fell to 33.8 and durable goods orders which fell more than 6% in November. Last but not least, GDP growth was revised downward to a decline of 0.5% for Q3-2008 and I expect further downward revisions and weaker numbers in upcoming quarters.
Chart 1 – Existing home sales slipped 3.1% in October to 4.98 million which is the same number it was last year but are off more than 25% from their peak in February 2007. But while sales have been holding their own, prices have not as we see from the next graph.
Chart 2 – The reason sales have held up is because home prices have been falling rapidly in the last year as the median price of an existing home dropped to $183,300 in October down 11.4% from October 2007 and off 20.4% from their peak in July 2006.
Chart 3 – Now compare the median price chart to this one of the year-over-year price changes for the Case-Shiller 20 City Composite Index which shows a drop of 17.44% to September and a drop of 21.8% since that price index peaked in July 2006. Very little indication of a bottom in the housing market here! Those who have followed both median price data and the Case-Shiller index will notice that once worlds apart, the two metrics have been converging adding further proof to our contention that the Case Shiller Index is a leading indicator.
Chart 4 – New home sales also took a 5.3% drop in October from September and are down 40.3% from October 2007. Meanwhile, the inventory of unsold new homes jumped to 11.1 months. This chart shows the comparisons between housing permits/starts with new home sales and inventories. Building continues to far outstrip demand and is the reason that inventories of unsold homes are approaching actual sales, a situation that will only continue to get worse as long as the industry continues to build new homes like a recovery is just around the corner.
Chart 5 – Durable goods suffered another big drop in October falling 6.2% from September versus a gain of 0.3% the previous month indicating increased weakness in consumer demand.
Chart 6 – The Chicago PMI, a key measure of manufacturing activity, suffered another big drop in November falling to 33.8 down from 37.8 in October. A reading below 50 indicates contraction. As we can see from the chart, the index has fallen rapidly in the last two months. We find out how the both the manufacturing and service ISM and construction spending numbers are doing next week.
Chart 7 – The latest GDP figures showed that the economy is now shrinking at 0.5% compared to a drop of 0.3% in the prior estimate. The probability is high that the estimate for Q3 and prior quarters will experience further downward revisions and based on the trendline, odds for future weakness are high. We will gain a further measure of how much consumers have cut spending in the upcoming month in the all-important holiday shopping season. SynopsisBottom watch updateIt is interesting to see how the smart money (hedge funds, market makers and brokers) have been reacting to the market turmoil over the last seven weeks after prices collapsed during the week of October 10. For the Vanguard Total Market ETF (VTI), a broad metric of the overall market, volumes spent the first four weeks building but prices remained relatively firm. Then last week, price fell to a new low but on lower volume than the prior week and prices bounced last week to close well off their inter-week lows which is bullish. It shows that the smart money has been buying. A 12.7% gain this week in the VTI, which closed at $44.30 on higher volume (than last week), is very bullish and shows more buyers than sellers. The fact that this happened on negative economic news makes it even more bullish. This is further confirmation that we may be at a bottom of sorts and how markets react over the next couple of weeks will be important. If we see another solid upmove on above average volume it will show that buying is continuing, especially if VTI breaks above its downward sloping descending triangle resistance line around $45 on volume, will provide further bullish confirmation. However, we are in a bear market and even though bear rallies can be powerful short-term, they are counter-trend so require firm stop-losses and the ability to exit quickly if buyers are spooked. A break of support around $40 would be bearish.
Figure 2 – Weekly chart of the Vanguard Total Market ETF (VTI) showing what the smart money is doing. As we see from the candle last week, there were obvious signs of smart money buying as volume was high and price closed well above new lows which is bullish. This week was followed by a healthy price jump on high volume which further bullish confirmation. Chart by TradeGuider.com Data by RealTimeData.com Stories of interest this week… Asian economies stumble and U.S. faces retail test U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit (Update2) http://www.bloomberg.com/apps/news?pid=newsarchive&sid=an3k2rZMNgDw Obama’s Troika May Push for Deeper Role in Economy, Markets http://www.bloomberg.com/apps/news?pid=20601087&sid=avkILynvOGiw&refer=home Citigroup Gets Guarantees on $306 Billion of Assets (Update2) http://www.bloomberg.com/apps/news?pid=20601087&sid=aP4OqmI48VQ8&refer=home China’s ‘Stimulus Package 2’ May Help Economy Top 8% Growth http://www.bloomberg.com/apps/news?pid=20601110&sid=ab3QyFvM.RlY China's economic downturn deepens CEOs, famous investors hit hard by market plunge http://ap.google.com/article/ALeqM5hYJ5fWoswQ7VrX16LUOwkd4K6ZPQD9472T580 Japan’s Recession Deepens as Output Falls, Consumers Spend Less http://www.bloomberg.com/apps/news?pid=20601068&sid=aWeheURJM.Sc&refer=home Obama Scores A's in Politics, Flunks Leader Test: Kevin Hassett http://www.bloomberg.com/apps/news?pid=20601110&sid=amI2XKsFI0bI Australian, New Zealand Dollars Slide as Central Bank Cuts Loom http://www.bloomberg.com/apps/news?pid=20601087&sid=aKbnJULP9nSE&refer=home Videos How listening to fundamental analyst forecasts will cost you money http://www.youtube.com/watch?v=2I0QN-FYkpw Shiller says crisis may last for ‘years and years’ http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vwJrIHv24Ics.asf --------------------------------------------------------------------------------------------------------------------- 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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