| TSG Weekly Market Watch December 12, 2008 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 14 December 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending December 12, 2008Topics Discussed This Week:Mr. Market Still Feeling Good Leaders bounce back Q3 earnings – down for the count Economy shows scant signs of strength Santa Claus rally comes early?
Last week
Quote of the week “The government would give up yield to unfreeze credit markets if it would help. But right now there’s a tremendous flight to quality that’s going on. A lot of people globally are concerned still about the viability of the financial system.” Mirko Mikelic, Fifth Third Asset Management Mr. Market Still Feeling GoodThe mysterious lift to hit markets last week continued this week as stocks inched higher despite the almost continual stream of abysmal news. Since bottoming November 20, the major indexes continue build a series of higher lows. Bespoke Investment Group pointed out an interesting recent trend. In the last four Fridays, the S&P500 has started off either down or has weakened to mid-day but has then rallied into the close. That trend continued this week. Technically SpeakingLeaders bounce backLast week, Dan Zanger’s Sunday pix registered a 13% drop. This week his pix gained 3.3% which was a distant second to the Emerging Market ETF (EEM) up an impressive 10% but the fact that his pix outperformed the rest of the market is bullish. As we said last week, the rampant manipulation taking place by the Fed and government has thrown a major monkey-wrench into how markets should work, acting as effective bear repellent. We saw that in market action again this week, which is even more bullish for next week. This week Dan’s portfolio of 11 stocks was nearly totally changed from last week and included Apple (AAPL), Direxion Large Cap BL (BGU), Fluor Corp (FLR), IBM (IBM), iSharesFTSE/China (FXI), Jacobs Eng (JEC), MasterCard (MA), Russell 2000 (RUT), Salesforce.com (CRM), SunPower Corp (SPWRA) and US Steel (X).
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 which is mildly bullish for the Dow Transports since they fell but bearish for the rest of the indexes that rose. Rising prices on falling volume shows that buyers are dropping out of the game and is often followed by further price declines. Although the selling seems to have abated of late, so has buying in spite of the trillions being spent to push markets higher and it will take rising volumes on rising prices to indicate buyers are entering the market in increasing numbers. After rising to 59.93 last week, the Market Volatility Index (VIX) spent the week losing ground to close at 54.28 Friday. The drop reflects the fact that markets appear to be settling down somewhat due in a large part to the Fed playing Santa to bankers in exchanging toxic garbage for the fresh-minted greenbacks, even if it is our money. After surging last week, the 19 commodity NYFE CRB Index recovered strongly this week to close at 345.17, up from 323.20 last week. But before we can call it a bottom, we will need to see prices level off and a series of higher lows and higher highs. Since hitting a high of 611.51 three months ago, the CRB Index is down 44% from its peak. Gold jumped big-time this week to close at $820/oz up from $752.30 last week, but basically back to where it was two weeks ago (around $815). Although we are clearly in a deflationary period, investors appear to still be seeking a haven in gold amid the economic turmoil. As well much of this week’s gain was due to the big drop in the dollar. Throwing money around by the Fed combined with the Big-3 blues got the greenback down this week as the U.S. Dollar Index took a big hit to close at 83.68 down from 86.87 last week. As we said last week, our dollar has been labeled the tallest midget in the room when compared to other currencies and central bank efforts to devalue their currencies. But many analysts believe it is only a matter of time before traders wake up and realize just how vulnerable the dollar is and act accordingly. Since bottoming in July, the U.S. Dollar Index has seen its gain pared from 22 to 16%. On the subject of volume, crude moved up to close at $49.43 from $42.93 last week on significantly higher volume and that is bullish. Oil is still down 66% from its halcyon mid-summer high of $147.20. 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 to 0.21% (from 0.16% last week). Could this be an indication of where the target rate is headed the FOMC next week? Credit markets have leveled off as the 3-month London Interbank Offered Rate (LIBOR) slipped again to 1.9213% (from 2.1856% last week). And thanks to help from the Fed in continuing to buy at the long end of the yield curve, Freddie Mac mortgage rates slipped again to 5.47% (from 5.53% last week and 5.97% two weeks ago) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) rose to 5.09% (from 5.02% 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. EarningsQ3 Earnings – Down for the countIn the tenth week of Q3-08 reporting season with a total of 3950 companies having reported (up from 3872 companies last week), average earnings held steady at -62% (from -63% two weeks ago, -38% five weeks ago and -13% in the season opener) versus Q3-07. We don’t expect this depressing number to change much since reporting season is all but over. 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. Earnings are now experiencing their biggest drops since first turning negative in Q3-07. Economic ReportsEconomy showing scant signs of strengthIt was a relatively slow week for economic reports as we learned that pending home sales fell 0.7% in October. But it has turned out to be of little use due to the fact that it does not include cancellations and is regularly revised. We also learned that October wholesale trade slipped 1.1% and the November federal budget deficit fell to $164.4 billion from the $237 billion deficit in October while the October trade deficit got slightly worse at $57.19 billion from $56.47 billion in September. Import prices also dropped 6.7% in November which is bad news for the consumer sector while November retail sales fell 1.8% and retail sales ex-autos rose 0.3%. We did get on potentially positive sign this week that shipping demand may be picking up if only marginally from the Baltic Dry Index. Down more than 94% from its May peak to last Friday, the index ticked up this week which could indicate that shipping demand (and the global economy) has reached at least a temporary bottom. Next week we will be interested to see what is happening to U.S. Treasury international capital flows which tell us how interested foreigners are in continuing to finance our profligate consumer and government spending ways for a small return. On that note, the return on three-month U.S. Treasuries dropped to negative this week for the first time since 1941 as investors paid to have their money in what they considered safe investments. How much risk tolerances have changed in just six short months!
Chart 1 – As we see from this chart, import prices have fallen rapidly since July as consumer demand deteriorated.
Chart 2 – In the potentially good news department, after collapsing from its all-time high of 11,793 on May 20, 2008, the Baltic Dry Index which measures international dry-goods shipping rates (and is therefore a good leading economic indicator not prone to manipulation or speculation) fell more than 94% to 663 on December 5, for the lowest reading since 1986. This week it staged a small recovery to close at 764 Friday. Could this mean the worst in shipping rates is over and that demand (and the global economy) will pick up from here? We will track it and keep you posted. SynopsisSanta Claus rally comes early?Although the Fed has been playing Santa to Wall Street, could the regular Santa Claus rally be helping out? Normally arriving just before Christmas and lasting for the last five trading days in December and first two in January, it has been good for an average 1.5% gain for the S&P500 since 1950. Another gift for investors usually comes in the way of cheap stocks beaten down by tax-loss selling this time of the year. According to the 2008 Stock Trader’s Almanac, stocks selling at their lows on December 15 will usually outperform the market by February 15 in the New Year. Although this year is anything but normal, no matter how bad it is two Santas are surely better than one. Maybe that will be enough to do this trick this year and give us the rally everyone’s been hoping for. Smart money updateAlthough the large caps rallied this week volumes were lower and that is bearish. Here’s what the picture looked like on the weekly chart of the Vanguard Broad Market ETF symbol VTI.
Figure 2 – Weekly chart of the Vanguard Total Market ETF showing three positive signals (green). However, note that volume has steadily dropped over the last three weeks which does not bode well for the long-term health of this rally. Data by Realtimedata.com Chart by TradeGuider.com Last week, we got a signal (last green rectangle) that a smart money test occurred on low volume which should have been quite bullish. However, VTI did not move down to a new low (which would have added greater strength to the test) and the next candle did not occur on a wide spread and close on the high (which would have made it more bullish). We may see this occur next week but the fact that this week’s spread was narrow is bearish and that it occurred on low volume is even more so. Stories of interest this week… Fed Refuses to Disclose Recipients of $2 Trillion http://www.bloomberg.com/apps/news?pid=20601109&sid=aXNaCKxb.oIs&refer=home Fed May Sell $2 Trillion Bonds, Bank of America Says http://www.bloomberg.com/apps/news?pid=20601110&sid=ah06XLfp0Ct0 Bernanke ‘War Powers’ Undermine Fed Bank Presidents http://www.bloomberg.com/apps/news?pid=20601170&refer=special_report&sid=a.g.iJbCJq3U Jim Rogers calls most big U.S. banks "bankrupt"http://www.reuters.com/article/InvestmentOutlook09/idUSTRE4BA5CO20081211 Treasury Bills Trade at Negative Rates as Haven Demand Surges http://www.bloomberg.com/apps/news?pid=20601087&sid=aOGXsWKEI6F4& Treasury’s Lowest Yields Offer No Help to Companies http://www.bloomberg.com/apps/news?pid=20601109&sid=aWlAPF7Hpo4U&refer=home Worsening Spending Slump Paces ‘Scary’ U.S. Recession http://www.bloomberg.com/apps/news?pid=20601087&sid=aT3tIUszCRuY&refer=home Fannie, Freddie May Waive Appraisals for Refinancings http://www.bloomberg.com/apps/news?pid=20601110&sid=aRUu8VhISqEo Q Ratio Signals ‘Horrific’ Market Bottom, CLSA Says http://www.bloomberg.com/apps/news?pid=20601110&sid=as0OqKgfd70c High Re-Default Rates on “Saved” Mortgages http://calculatedrisk.blogspot.com/2008/12/dugan-high-re-default-rates.html --------------------------------------------------------------------------------------------------------------------- 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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