| TSG Weekly Market Watch January 30, 2009 |
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| Sunday, 01 February 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending January 30, 2009Topics Discussed This Week:
Barometer shows worsening storm… Leaders outperform, gain ground Q4 earnings – Rough ride still getting rougher Housing depression (part 2) GDP – Hope versus reality Emerging market relative strength
January Barometer
Quote of the week “The Fed needs to establish the boundaries on the credit- policy side between itself and the government. Liquidity assistance is a credit policy. No accord protects the Fed’s credit policies from misuse the way the 1951 Accord protects monetary policy,” Marvin Goodfriend, economics professor and former research director at the Richmond Fed. Barometer falling fast… Following the first week of January, we declared that the First Five Day indicator (as go the first five trading days, so goes the rest of the year) was positive and an optimistic sign. Let’s face it, we need all the good news we can get! However, we got confirmation Friday that that signal probably doesn’t mean much. A far more accurate prognosticator of yearly stock performance, the January Barometer, confirmed what many already knew – 2009 is looking like it will continue being tough. The 8.84% drop in the Dow means two things. First, there is a 74.4% chance that the Dow (and SPX) will be lower at the end of the year based on the historic performance of this indicator. Second, it was also the worst January on record for the Dow Industrial Average surpassing the 8.6% drop the index registered in January 1916. With the exception of the Emerging Markets ETF (EEM), stocks finished their fourth consecutive week with losses across the board for the major indices and most now sit at or very near to key support levels. If they are broken, the prognosis is not good. Technically Speaking Leaders move up for second week This week Dan’s portfolio of 14 stocks included ITT Educational (ESI), Apollo Group (APOL), Agnico Eagle (AEM), AngloGold (AU), Rangold Resources (GOLD), Barrick Gold (ABX), Apple (AAPL), Synaptics (SYNA), Baidu.com (BIDU), EOG Resource (EOG), GameStop (GME), Holders Oil Servs (OIH), Hess Corp (HESS) and Google (GOOG) that as a group outperformed the major indexes as well as EEM. That would normally be considered bullish.
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 remained (just) below average for the major indexes and were higher than last week but the fact that prices closed at the low end of their weekly range is bearish. It shows that the bears were more ferocious than the bulls. At least major support levels continue to hold for the Dow Industrials, Nasdaq and NYSE but that prices moved closer to support is not bullish. However, emerging markets, small caps and techs are outperforming large caps and that is bullish. After peaking above 80 November 20, falling then rising again with a VIX peak above 55 January 20 shows that fear continues to permeate the markets. This week the Market Volatility Index (VIX) dropped to 40 before rising Friday to close at 44.84 down from 47.27 last Friday. 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 to close at 364.5 from 365.56 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 moved higher again this week to close at $926.80/oz up from $895.60 last week. Although we are still in a deflationary period and investors continue to seek a haven in gold, volume continues to steadily decline and that is bearish for the yellow metal. Meanwhile the dollar continues to remain surprisingly strong as the U.S. Dollar Index closed higher for the sixth week ending the week at 85.86 up from 85.60 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 $41.75/bbl from $42.27/bbl last week. Interestingly, volume again was extreme after hitting record highs last week indicating a possible capitulation point from which prices can rally. Oil is down more than 70% from its mid-summer high of $147.20. U.S. bank prime rate and the Fed funds target rate held steady again this week at 3.25% and 0.00% - 0.25% respectively while the effective Fed funds rate bumped up again to 0.24% (from 0.20% last week). Meanwhile, the 3-month London Interbank Offered Rate (LIBOR*) firmed again to 1.18438% (from 1.16938% last week). This compares to LIBOR 52-week high of 4.81875% last October. Meanwhile Freddie Mac mortgage rates slipped marginally to 5.10% (from 5.12% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) slipped to 4.90% (from 4.92% 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 continues In the fourth week of Q4-08 reporting season with a total of 1055 companies having reported (up from 609 last week), average earnings are now down ??? (the WSJ did not post the data this week) compared to Q4-07, versus -80% last week and -60% two weeks ago. This compares to a drop of 62% for Q3-08 versus Q3-07. But we did learn that with half the S&P500 companies having reported so far this season, Q4-08 earnings for this illustrious group were down 42% over the same quarter last year and that is a disastrous showing. So whether it turns out that they are down 80%, 70% or 90% this week probably doesn’t matter all that much. Given that earnings have experienced their biggest drops since first turning negative 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 (part 2) This week kicked off with a report from the National Association of Realtors (NAR) saying that existing home sales jumped 6.5% as existing homes sales ticked up from a downward revised annualized rate of 4.45 million in November to 4.74 million in December while the inventory of unsold homes fell from 11.2 months in November to 9.3 months. According to head NAR cheerleader, Lawrence Yun, a perennial Pollyanna if there ever was one, “buyers will continue to have an edge over sellers for the foreseeable future.” But he slipped in his signature optimistic spin, “we’ve added 25 million people to our population over the past decade and housing affordability conditions are the best we’ve seen since 1973.” Huh? His comments are based on the NAR’s Housing Affordability Index (HAI) that hit a high of 142.4 in November, the highest reading since the mid-1970s according to the group’s statistics. This index has three components – fixed and adjustable-rate mortgage rates, median home prices and median family income – and is ratio of median family income divided by income required to qualify for an 80% mortgage to buy the median priced home at current interest rates * 100. Walter Maloney from the NAR was unsure whether the median family income factored in the rising number of unemployed or only included working families. Looking at the NAR median incomes data that show month-over-month increases, I suspect it does not include those that have lost jobs. With real incomes falling, a recession in play and inflation adjusted home prices still well above their historic average (having only fallen back at 2004 levels), the NAR HAI must be considered suspect at best. On a year-over-year basis, existing home sales are down 3.5% from December 2007 and down 29% from their peak in February 2007. Median prices fell 2.7% between November and December, are down 15.8% year-over-year and off 23.8% from their July 2006 peak. It is interesting to note that the S&P Case-Shiller home price index (latest figures released Tuesday) is now off 18.2% year-over-year to November and 25.15% from its July 2006 peak for the 20-city composite showing how these two metrics have converged as the correction has matured. This is in spite of prior claims by the NAR and other eternal optimists that the Case-Shiller index was too pessimistic and did not accurately reflect prices.
As we see from the above chart, there has been a very approximate four-month lag between changes in sales and impact on prices over the last three years. And although there appears to be a strong relationship between the two, median prices experienced a jump between January and July 2007 as well as February to April 2008 that had no relationship to sales. Also note that both sales and median prices tend to be quite volatile with sales rising one month then dropping the next but with a strongly negative overall trend.
Here we see the rate of change in home prices and they are still declining at record rates of 18.2% year-over-year which as we see from this chart, show little signs of stabilizing. Chip Case, co-creator of the CSI, commented this week that he thought the housing situation was looking a little better with “the glass a third full” thanks to declining inventories and falling housing starts which will help ease the glut of unsold homes. But any sustainable improvement depends on the economy and a stabilization of jobs markets he said. These are two very big ‘ifs.’
We then learned on Thursday that new home sales suffered a much larger drop than expected in December with a month-over-month decline of 14.7% to 331,000 homes (annualized). Sales numbers for August, September, October and November were also revised lower. For the first time in decades, the annual rate of new home sales dropped below the number of homes currently for sale with inventories hitting 357,000. That means it would take roughly 13 months to sell all the new homes for sale without building another home. But as we see from the above chart, there are still 550,000 new homes being added to the glut each year. Is it any wonder builders are such a depressed group? The median price of a new home dropped 6% in December (from November) and prices are down 17% in the last twelve months.
We learned Friday that GDP growth fell 3.8% which was the worst showing in 26 years. It was the weakest economic performance since the 6.4% drop in Q1-1982. But forecasters continued to say that things would get steadily better from here projecting -3.3% in Q1-09, -0.8% in Q2, +1.2% in 3 and +2% in Q4-09. But these forecasts are based more on hope than any concrete data or credible indicators showing economic improvement. The drop in the Chicago Purchasing Manager’s Index (PMI) to 33.1, the worst reading in decades and a pre-cursor to the Institute of Supply Management data due out next week, didn’t help the bullish case. Synopsis Emerging markets leading U.S. stocks… Last week we discussed Elliott Wave and what it is telling us about the market based on Elliott’s well documented studies of human behavior and market wave analysis. We saw how the Dow Industrials Average was stuck in a corrective pattern (against the primary trend which is down) that presented the possibility of higher prices short-term. However, once the correction pattern is over we expect the Dow to resume its down trend taking it to around 7550 before attempting the next rally. As we see from this week’s index table above, the Emerging Markets ETF (EEM) was the only one to make gains this week. On a relative strength basis, emerging market stocks are currently outperforming U.S. large caps and have been doing so since October 24. As we see from Figure 4, the daily and hourly charts of EEM tell an interesting story - the hourly puts the short-term target for EEM (which closed at $22.65 Friday) between $18 and $20 and the daily puts the longer-term target between $28 and $32. So how can we use this information? If we do get a rally next week, the EEM will likely rally more that the S&P500 or Dow and if weakness continues, it should drop less. The fact that the EEM, Nasdaq Composite and Russell 2000 small caps are leading higher, is bullish for the markets shorter-term.
Figure 2 – Daily chart of the relative strength of Emerging Market ETF (EEM) to the S&P500 (SPX). When this chart rises, it shows that the EEM is outperforming SPX and when it falls, it is underperforming the SPX. Chart by GenesisFT.com  Figure 3 – Daily (left) and hourly (right) charts of the EEM showing longer-term and shorter-term Elliott wave counts and targets. Chart courtesy of Refined Elliott Trader (RET) by Elliottician.com
Stories of interest this week… Geithner’s Yuan Call Rejected as ‘Horrible Advice’ (Update1) http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aBQdn3cLW8og RBS Taxes, Hailed as Contribution to Society, Erased by Rescue http://www.bloomberg.com/apps/news?pid=20601109&sid=a0zgIzFIXSl8&refer=home Bernanke Risks ‘Very Unstable’ Market as He Weighs Buying Bonds http://www.bloomberg.com/apps/news?pid=20601109&sid=aZ0bwWpcnFaM&refer=home Japan Heads for Worst Postwar Slump as Output Tumbles (Update2) http://www.bloomberg.com/apps/news?pid=20601087&sid=ajYVauBUFvcE&refer=home Home Prices Fell in 24 U.S. Metro Areas as Foreclosures Rose http://www.bloomberg.com/apps/news?pid=20601110&sid=aOHec_7mOt8k VIDEOS Ken Rogoff on U.S. economic outlook 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… Baxter's First Law — Government intervention in the free market always leads to a lower national standard of living. --------------------------------------------------------------------------------------------------------------------- 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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