| TSG Weekly Market Watch January 23, 2009 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 25 January 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending January 23, 2009Topics Discussed This Week:
Red sky in the morning… Leaders outperform, gain ground Q4 earnings – Rough ride still getting rougher Housing depression continues An Elliott Wave point of view… Special Report – The Pollyanna Paradox
Last week
Quote of the week “If [my estimate that losses from the credit crisis reach $3.6 trillion is correct], it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.” – Nouriel Roubini at a conference in Dubai this week. Red sky in the morning… Stocks finished their third consecutive (albeit holiday-shortened) week with losses across the board for the major indices in our table (above) as the global economy provided more signs of slowing. We also experienced the worst Inauguration Day loss in history Tuesday. But perhaps more sobering is what as we learned with the failure of a German €6 billion sovereign bond auction Wednesday, “as investors shunned one of the most liquid and safe assets in the world in a warnings for governments seeking to raise record amounts of debt to stimulate slowing economies,” according to an FT report. This is certainly a troubling development given that governments around the world hope to issue an estimated $3 trillion in debt this year, or more than three times that in 2008 according to the report. Spendthrift politicians in Washington should sit up and take note! Economist Nouriel Roubini now estimates that losses from the credit crisis may reach $3.6 trillion, prompting our quote of the week (above). In another article (see “Monetary union has left half of Europe trapped in depression” below), we got a quick summary on how Euro zone members are faring in the worst recession in decades. It is causing the European Central Bank to provide a “stealth bailout for Europe’s governments – though secrecy veils all,” according to the Telegraph article. It is not a pretty picture and could put some serious cracks in the decade-old euro currency and member nation trade zone. Technically Speaking Leaders movin’ on up This week Dan’s portfolio of stocks again included Apollo Group (APOL), Research in Motion (RIMM), Apple (AAPL), Mosaic (MOS), EOG Resources (EOG), Monsanto (MON), Synaptics (SYNA), Bank of America (BAC) which he was bearish on, Holders Oil Servs (OIH), and contra ETFs, ProShares UltraShort Financials (SKF) and ProShares UltraShort Real Estate (SRS) showing that Zanger is still hedging the downside. His strategy worked. It outperformed the other indices in the chart. Last week while his pix led the market, they lost money which warned of more general weakness this week. Given the volatility, we can’t say conclusively that the market will go up based on performance this week, especially since three of his picks were to the downside but it does show that a well balanced portfolio in these troubling times can actually make money.
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 dropped below average for the major indexes but the fact that this occurred on falling prices is actually bullish. Falling prices accompanied with falling volume shows that selling is abating and that is good news. Major support levels continue to hold for the Dow Industrials, Nasdaq and NYSE closed well off their weekly lows and that is also good news. Rising prices need to be accompanied by rising volume if this rally is to resume and have any staying power. After peaking above 80 November 20 then falling through the first week of the year, the Market Volatility Index (VIX) jumped back above 50 again early this week before settling down to close at 47.27 Friday versus a close of 46.11 last week. However, this is still historically high and shows that while fear is abating, it is still very much a part of this market. After surging over the last six weeks, the 19 commodity NYFE CRB Index moved marginally higher again this week to close at 365.56 up from 360.06 last week. Since hitting a high of 611.51 in July then losing nearly 50%, the CRB Index has pared its loss to 40% from its peak. Gold jumped big time this week to close at $895.60/oz up from $840.70 last week. Although we are still in a deflationary period and investors continue to seek a haven in gold, but volume continues to steadily decline and that is bearish. With a Democratic President, Senate and Congress and their promises of big spending programs, the dollar continues to remain surprisingly strong as the U.S. Dollar Index closed higher for the fifth week ending the week at 85.60, up from 84.06 last week. Since bottoming in July, the U.S. Dollar Index has gained 19%. After a five month slide followed by a strong rebound two weeks ago, crude slipped again this week to close at $42.27/bbl down from $45.69 last week. Interestingly, volume hit its highest levels on record which could indicate a capitulation point. Oil is down more than 70% from its mid-summer high of $147.20. After falling 75 basis-points in early December, the U.S. bank prime rate and the Fed funds target rate held steady again at 3.25% and 0.00% - 0.25% respectively while the effective Fed funds rate bumped up again to 0.20% (from 0.19% last week). Meanwhile, the 3-month London Interbank Offered Rate (LIBOR*) firmed to 1.16938% (from 1.1425% last week). This compares to LIBOR 52-week high of 4.81875% last October. Freddie Mac mortgage rates firmed to 5.12% (from 4.96% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) firmed to 4.92% (from 4.89% 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 Q4 Earnings – A rough ride still getting rougher In the third week of Q4-08 reporting season with a total of 609 companies having reported (up from 435 last week), average earnings are now down 80% versus Q4-07, versus -60% last week and -48% two weeks ago. This compares to a drop of 62% for Q3-08 versus Q3-07. Consumer goods (retailers, restaurants, airlines etc) have been hardest hit with financials a close second. Given that earnings have so far experienced their biggest drops since first turning negative in Q3-07 and that results have deteriorated as reporting seasons have progressed, we expect results to continue to deteriorate as more companies report.
Economic Reports Housing depression continues It was a quieter week on the economics news front but another tough one for housing. On Wednesday we learned that the National Association of Home Builders sentiment index dropped to yet another new all-time low again to 8 in January from the previous record of 9 the previous month. Builders obviously have even less to be happy about than they did last year. Then on Thursday, we learned that December housing permits and starts also dropped but a more than expected 10.7% for permits and 15.5% for starts. On a year-over-year basis they are down 41% and 45% respectively. Since their peaks in January 2006 they have dropped 75.3% and 76%. We learn next week if existing and new home sales suffered similar fates. We also find out next week how badly the economy has suffered in Q4 with the latest GDP growth figures.
Synopsis A technical take from Elliott’s perspective… Few in the technical analysis world would argue with the contention that Ralph Nelson Elliott was a genius who lived long before his time, even if they don’t adhere to his teachings. The wave analysis principles he developed would have been amazing had they been developed with the help of computers but they did not exist his Elliott’s day. Born in 1871, he became an accountant with a rather illustrious career cut short by an amoebic illness picked up while working in Central America. This developed into a debilitating case of pernicious anemia leaving him bedridden at the age of 58. With nothing else to do and an actively mathematically-wired brain, he turned his attention to the markets just as stocks hit their peak in 1929. Elliott spent his days in bed studying daily, weekly and monthly charts as well as hourly and half-hourly intraday data available at the time going back 75 years. In 1934 his studies resulted in an astounding theory that markets moved in a series of waves that described investor behavior incredibly accurately which he presented to at least one member of the financial community – Charles J. Collins of Investment Counsel in Detroit. What got Collin’s attention was Elliott’s ability to accurately pinpoint hourly turns on the Dow Jones averages with a fair degree of accuracy by telegram. Elliott famously told Collins on March 13, 1935 that contrary to the general bearish sentiment at the time, all the averages were making a bottom. (For more on this fascinating part of market history, please see Ralph Nelson Elliott…. below). Anyone who has seriously studied Elliott Wave Theory is amazed at the degree of complexity combined with Elliott’s thorough and systematic approach to solving the riddle of human behavior in markets. The challenge to any practitioner is in putting all the pieces of the complex puzzle together to build a credible forecast. Experts around the globe spent the next four and half decades after Elliott’s death doing their own analysis until the early 1990s when Australian programmer Richard Swannell set out to code Elliott’s complex rules in a project that he originally projected to take six weeks. After many variations and permutations, he’d finally got to the point in 2008 of saying was close to achieving his goal. Thanks to an innovative screen saver program that allowed him to utilize the idle computer of more than 4000 volunteers’ machines, he was able to test all the various Elliott Wave patterns on a wide variety of markets and develop probabilities for each. He concluded that while most Elliott Wave patterns did accurately describe price movement, one could only know for certain which pattern it was for certain upon their completion – not very comforting for traders and investors. However, he did make one startling discovery. Of the more than one dozen common patterns recognized and documented by Elliott, he found that two provided very accurate clues to future market direction. Most Elliott Wave patterns begin with a three-wave on one direction then a three-wave in the opposite direction. These Elliott called corrective waves. But two patterns, an Impulse and ZigZag which he called motives because they move in the direction of the primary trend, began with a five-wave in one direction followed by a three-wave in the opposite direction. Swannell realized that while it was impossible to know before the pattern’s completion whether it was an Impulse or ZigZag, since they both had targets in the same direction, were tradable. So why tell this story now? According to Swannell’s software, a program called RET (Refined Elliott Trader), a ZigZag pattern which began at the Dow peak of 14,165 on October 9, and entered the second part (corrective three-wave pattern began on October 10, 2008) provides some very interesting insight into where the index is headed. When the current corrective phase is over (and we could see a 2000 or more point bear rally in the meantime), the next five wave impulse pattern should register a similar price decline that unless something goes seriously wrong, puts the target on the Dow well below 7000. This target gets even more interesting if you plot long-term trendline on the Dow (or S&P500) from the late 1970s and 1980s to present day. It also puts trendline support for the Dow back well below 7000. Finally, Dr. Robert Shiller’s long-term Price/Earnings research shows that in every serious bear market bottom back 120 years, annual trailing-ten year PEs dropped below 10 before a sustainable recovery could occur. That implies a price drop on the S&P500 below 600 or 28% below Friday’s close. And that translates to a Dow below 6000. Whichever way you slice it, it is looking like we could be in for some pretty tough sledding in the next year or so. Elliott Wave specialist Robert Prechter thinks it could last considerably longer and eventually be far worse. But before we become ferocious bears, we will first need to see current major support around 8000 on the Dow Industrials decisively broken on increasing volume before we’ll know the time has come to become a serious bear.
Daily chart of the Dow Jones Industrial Average (INDU) showing short-term and longer-term price targets on RET, courtesy of Elliottician.com Stories of interest this week… Ralph Nelson Elliott biography http://www.elliottwave.com/info/elliott_bio.aspx Monetary union has left half of Europe trapped in depression America’s banks need to hold a yard sale http://www.ft.com/cms/s/0/d742ba70-e7da-11dd-b2a5-0000779fd2ac.html Zero Rates Push Traders to Cash-Rich Swiss Franc, Yen http://www.bloomberg.com/apps/news?pid=20601109&sid=anW0hCr2pMt0&refer=home Yen Rises to Strongest Versus Dollar Since 1995 on Haven Demand http://www.bloomberg.com/apps/news?pid=20601087&sid=a7vIMMuNBHhg&refer=home Hedge fund made millions betting on Barclays crash http://www.guardian.co.uk/business/2009/jan/23/barclays-short-selling-hedge-fund U.S. Stocks Slide in Dow Average’s Worst Inauguration Day Drop http://www.bloomberg.com/apps/news?pid=20601087&sid=aOYw.awwsNSg&refer=home Japanese Housewives Desperate After Currency Ponzi Scheme Collapses http://www.bloomberg.com/apps/news?pid=20601109&sid=aGeeh4B_CLSE&refer=home Roubini, Edwards Predict Slump in S&P 500 on China (Update1) http://www.bloomberg.com/apps/news?pid=20601087&sid=aXouyZoIlrH0&refer=home Opinion Lame Fund Managers Head for an ETF Thumping: Jane Bryant Quinn http://www.bloomberg.com/apps/news?pid=20601212&sid=aJ0iz9WuEfVI&refer=home Americans ‘Get’ TARP, They Just Can’t Stand It: Caroline Baum http://www.bloomberg.com/apps/news?pid=20601039&sid=axDAgh7BrbK4&refer=home On the lighter side… Billings's Law — “Live within your income, even if you have to borrow to do so.” --------------------------------------------------------------------------------------------------------------------- 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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