| TSG Weekly Market Watch March 27, 2009 |
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| Monday, 30 March 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending March 27, 2009Topics Discussed This Week:
Rally just keeps on going… Leaders fall behind Earnings – Getting worse but not as fast… Home sales pick up at the expense of prices Elliott Wave says stocks heading down…
Last Week
Quote of the week "The main issue right now is that there's just a lot of [Treasury] supply out there. The Treasury is selling a lot more than the Fed is buying." − Futures trader Arthur Bass. Demand from domestic and foreign institutions for the $34 billion five-year Treasury note auction was 30% this week, compared to 48.9% from the previous auction in February and an average of 30.1% for the last 10 auctions. Rally marches on… It was another good week for stocks driven higher by expectations that toxic bank assets would be finally removed from bank balance sheets by the taxpayer. Before Friday’s 148-point drop, the Dow Industrials had gained an impressive 21% in just thirteen trading days. Stocks were further helped by some short-term good news in existing and new home markets which is really not good news at all. But the difference is that investors are now interpreting bad news by buying more stocks and that is a good sign as it shows sentiment is becoming more bullish. However, there is a chart pattern on the S&P500 which has bearish implications for the coming week…. Technically Speaking Leaders fall behind This week Dan’s Sunday March 22 portfolio of 10 stocks to watch included Apple, (AAPL), Baidu.com (BIDU), Broadcom (BRCM), Chicago MercantileBuckle (CME), Cree (CREE), FedEx (FDX), Goldman Sachs (GS), Mastercard (MA), Proshare UltraShort RE (SRS) and sTrackers Gold (GLD). This group underperformed the indexes and that is mildly bearish.
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 were again above average and indexes moved higher but volumes were lower for most of the major indexes. The exception was the emerging markets ETF EEM, which gapped higher on higher volume and this is bullish. However, this doesn’t mean we can’t have lower prices in the short-term. The Market Volatility Index (VIX) spent most of the week falling to close at 41.04 down from 45.89 last week and that is bullish. A rising VIX shows fear creeping back into the market in spite of rising prices. But the VIX is a very short-term indicator at best. Since rebounding off its December 5 bottom, the 19 commodity NYFE CRB Index has been moving higher but it lost ground this week to close at 366.13 down from 372.87 last week. Since hitting a high of 611.51 in July the index is still down 39% from its peak. After another big surge in gold to $1001.10/oz four weeks ago, the precious metal fell to $922.90/oz down from $955.70 last week and up from $928.50 two weeks ago. But as we have mentioned in past weeks, volume and open interest continue to decline which is bearish, especially given the second of two tops four weeks ago. Gold has a long way to drop to confirm the double top so this pattern offers little short-term trading value. Technically this spells further drops in gold but this will be offset by increasing government efforts to devalue the dollar as we clearly witnessed this week. After rising for the better part of two months then rolling over two weeks ago, the US Dollar Index rallied to 85.11, up from 83.73 last week. Since bottoming in July, the U.S. Dollar Index has paired its gain to 19%. Crude oil futures firmed again this week to close at $52.38/bbl up from $52.07 last week. Oil is still down nearly 64% from its mid-summer high of $147.20 and looks to be keeping the rally alive. The Baltic Dry Index, an indicator that tracks the cost of shipping dry goods by sea, slipped again this week to 1678, down 9.3% from last week. This is bearish for both the economy and the price of oil going forward. The U.S. bank prime rate and the Fed funds target rate held steady following the lasted FOMC meeting at 3.25% and 0.00% - 0.25% respectively while the effective Fed funds rate moved back down to 0.19% (from 0.23% last week). Meanwhile, the 3-month London Interbank Offered Rate (LIBOR*) slipped to 1.22% (from 1.22281% last week). This compares to LIBOR 52-week high of 4.81875% last October. Meanwhile Freddie Mac mortgage rates slipped this week to 4.85% (from 4.98% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) also fell to 4.85% (from 4.91% 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 – still getting worse With a total of 3485 companies having reported so far in the eleventh week of Q4-08 earnings reporting season (up from 3409 last week), the net loss on continuing operations widened to ($220.8) billion (from ($205.6) billion last week) versus +$122.4 billion in Q4-07 which is a -280.38% change from Q4-07. This compares to -279.7% last week, -266% two weeks ago, -262% three weeks ago and -46% in the opening week of reporting season. The final result for Q3-08 was -62% from Q3-07. However, notice that the rate at which earnings are falling is declining which is a good sign. Earnings continue to experience their biggest drops since first turning negative and we expect this trend to continue at least into next reporting season. Economic Reports Home sales tick up while home prices, GDP fall… Another big rally on Monday, this one due to the latest government bailout plan, but a 5% jump month-over-month in existing home sales was also partly responsible. It was another case of celebrating without fully understanding the numbers. Yes existing home sales rose but only because home prices suffered a big drop as the median price of an existing home fell from $175,700 in December to $165,400 in February (the January price was revised downward from $170,300 to $164,800). On a year-over-year basis prices have fallen 15.6% and are down 28.2% from their peak in July 2006. I don’t see anything to celebrate about at least not in the housing department.
New home sales also improved jumping 4.7% in February versus January but prices are now down 18% year-over-year – a situation that will be further exacerbated by the jump in housing starts in February. The final estimate of Q4-08 GDP came in a -6.3% down from the previous estimate of -6.2% but this could be revised for up to 18 months so we don’t put a lot of stock in it at this point (or any point for that matter due to the tremendous amount of statistical hanky-panky to manufacture this figure). Synopsis Elliott Wave says stocks heading down… Last week we projected an intermediate-term target of 850 on the S&P500 after the corrective wave ended. That happened a little sooner than we expected (Friday March 20) and we got a powerful rally Monday. In the next chart we see a 1 minute chart of the S&P500 Index showing the three five-wave corrective Ending Diagonal (ED) pattern which has bearish implications. As I write this, the Nikkei 225 Index is down two percent (11:00AM Tokyo time). And although RET shows targets 1, 2 and 3 above 860 (below), these targets are not possible at this time given the current ED pattern. It could also have longer-term bearish implications for this current rally but we’ll have a clearer picture next week.
Chart courtesy Refined Elliott Trader Pro (RET Pro) by Elliottician.com On the lighter side… Slogan we saw on a baseball cap recently. “YOU DRIVE ME TO DRINK! (I’ll buy gas…) Stories of interest this week… Hedge Funds, Buyout Firms Say Regulation Unstoppable http://www.bloomberg.com/apps/news?pid=20601087&sid=ajq8MuPTxQy8&refer=home Baltic Bust Sows Entrepreneur ‘Panic’ in EU’s Worst Economies http://www.bloomberg.com/apps/news?pid=20601109&sid=aa8ZRBQ6sSg0&refer=home U.K. Recession Worse Than Estimated on Spending Slump http://www.bloomberg.com/apps/news?pid=20601087&sid=aZtgamsmkWJ0&refer=home N.Y. Said to Boost Income Tax on Earnings Exceeding $300,000 http://www.bloomberg.com/apps/news?pid=20601110&sid=aEN5a_efY94o Tax Dodgers Multiply as ‘Underground Economy’ Cushions Job Cuts http://www.bloomberg.com/apps/news?pid=20601109&sid=aCuiJAVv6ZOc&refer=home -------------------------------------------------------------------------------------------------------------------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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