| TSG Weekly Market Watch April 24, 2009 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 26 April 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending April 24, 2009Topics Discussed This Week:
Rally takes a breather? Leaders bounce back again… Earnings forecasts show signs of hope Existing and new home sales fall Waiting for Case-Shiller Soaring spending amid declining Treasury sales = Mission Impossible? Elliott Wave Perspective on the S&P500
Last Week
Quote of the week “Tax receipts are just collapsing. [The need to sell more debt] is a big issue in the Treasury market and it is ongoing. The surging budget deficit is the primary cause.” Head Stamford UBS Securities interest-rate strategist Chris Ahrens. Rally takes a break? It has now been seven weeks since this rally began and this week stocks took a break. Since hitting its low in the first week of March, the S&P500 is up nearly 28%. Last week we mentioned that the S&P500 index was 9.6% above its 50-DMA and that is about where it stayed this week (9.5%) so stocks remain overbought. But indexes are also still banging up against key resistance areas that taken together with how overbought stocks are across the board, increases the chances for a correction. And now this rally is losing momentum. If prices hold up it will show that investor demand and interest in stocks is increasing despite the technicals pointing to a drop. But that must be considered a long shot. Technically Speaking Leaders bounce back… Last week’s Dan Zanger’s leaders shot higher which was a good indicator for the overall market. This week Dan’s Sunday April 19 portfolio of stocks either breaking out or poised to do so, consisted of 11 stocks including Apple, (AAPL), Bank of America (BAC), Changyou.com (CYOU), Ctrip.com ADR (CTRP), Google (GOOG), Holders Oil Services (OIH), KBR Inc (KBR), MBIA (MBI), MasterCard (MA), Research in Motion (RIMM) and S&P Energy (XLE). As you can see below, the chart dropped to start the week then took off with Dow Transports leading the way followed closely by the Nasdaq Composite and Dan’s market leaders. This is again bullish for next week except that we are still overbought with stocks due for a rest here.
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. After steadily dropping from March 20 to April 10, weekly volumes again were above average for the major indexes and in the case of the Dow Jones Industrials and S&P500 Indexes, this is bearish since both lost ground. But it does show investors are increasingly moving back into the market and that is bullish. But the Market Volatility Index (VIX) reversed course this week and started to rise again and that is somewhat bearish with the VIX moving up to close the week at 36.82 from 33.94 last week. This puts it back to levels it was at two weeks ago. Since rebounding off its December 5 bottom, the 19 commodity NYFE CRB Index lost a little ground this week to close at 372.50 off from 376.25 last week. Since hitting a high of 611.51 in July the index is still down 38% from its peak. After the surge in gold to $1001.10/oz the week of February 20, the precious metal has fallen but surged again strongly this week to close at $913.80/oz from $869.50 last week. Volume and open interest remain low which is bearish following the second of two tops February 20. Gold still has a long way to drop to confirm the double top so this pattern offers little short-term trading value. From a technical and seasonal perspective, gold looks to be headed lower with the metal often putting in a seasonal low in July. Meanwhile, after putting in a bottom of sorts six weeks ago, the US Dollar Index slipped to 84.72 this week down from 85.98 last week and 85.79 two weeks ago. Since bottoming in July, the U.S. Dollar Index is up nearly 20%. Crude oil futures slipped again as a barrel of crude slid to $51.49/bbl from $52.31 last week and $54.69 two weeks ago. Oil is still down nearly 62% from its mid-summer high of $147.20 and the rally remains alive. The Baltic Dry Index, an indicator that tracks the cost of shipping dry goods by sea, rose again this week to 1873 (up 7.8% from 1682 last week). This is somewhat bullish for both the economy and the price of oil going forward as it shows increasing demand to ship goods to customers around the globe. 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 firmed to 0.18% (from 0.14% last week). Meanwhile, the 3-month London Interbank Offered Rate (LIBOR*) slipped again to 1.0725% (from 1.10188% last week and 1.13125% two weeks ago). This compares to LIBOR 52-week high of 4.81875% last October. On the mortgage front, Freddie Mac mortgage rates slipped this week to 4.8% (from 4.82% last week and 4.87% two weeks ago) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) slipped to 4.82% (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 This week, the ratio of earnings upside versus downside revisions improved to -28.4% as analysts raised estimates for 340 companies up while cutting them for 766 companies for a net negative of 426 companies in the S&P1500. Last week, the ratio was a net negative of 482 companies (-32.1%) according to Bespoke.
Unfortunately, Bespoke only presented data going back 18 months so no significant conclusions can be drawn but improving earnings forecasts are a good thing as long as this trend continues. Economic Reports Not a real busy week for economic reports. On Thursday we learned that existing home sales fell 3% in March to an annual rate of 4.57 million. Median prices, an unreliable gauge of home prices due to the impact a changing market can have, rose 4.2% for what its worth to $175,200. A much more reliable comparative price metric is the Case-Shiller home price index with the latest figures due out Tuesday, April 28. Then on Friday, we learned that new home sales also fell 0.6% in March to an annualized sales rate of 356,000 while the unsold inventory slipped to a 10.7 month supply versus 11.2 months in February and 12.5 in January. Overall, there are few signs of the new and existing home markets showing any measurable improvement. Finally, durable goods orders fell 0.8% in March but the more important takeaway is that they are now down 25.2% year-over-year. On the possible good news front, manufacturing contraction may be slowing but it is important to point out that this metric is quite volatile. Synopsis Treasury demand surges amid falling supply = Mission Impossible? Last week we discussed the declining sales of US Treasuries with a net drop (redemption) of $97 billion in Treasuries by foreigners in February in the latest Treasury international capital flow (TIC) data. This followed a record net redemption of $148.9 billion by foreigners in January. The government will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009, according to an recent estimate by UBS. How does this compare with past Treasury sales? From October through December, the Treasury sold a record $569 billion, up a whopping 693% from the $82 billion it sold during the same period a year earlier, and auctioned another $493 billion in the last quarter up from $156 billion the year before according to Bloomberg, as the government increasingly finds itself squeezed between rocketing expenditures and collapsing tax revenues (see article “Soaring US Budget Deficit…”). As the above graph shows, domestic investors will have to fill the widening fiscal gap as a result of falling international demand which will put increasing upward pressure on interest rates.
Be sure to look for our upcoming monthly report entitled Paying the Presumptuous Piper that discusses the Obama plan to raise tax revenues 40% by 2013 and the impact it will have on taxes and the economy. Unless the economy experiences a miraculous recovery, increasing the tax burden amid a declining economy is not only an extremely bad idea, it turns Treasury’s gargantuan task of financing the rapidly rising debt burden as spending soars into Mission Impossible. What does this mean for traders and investors? First, this is inflationary because if history is any guide, the government will print more money and employ more helicopters from which to throw it into the economy, a methodology euphemistically labeled “quantitative easing.” The next all-too predictable development will be strong upward pressure on interest rates as U.S. Treasury investors demand higher returns to offset their losses due to increasing inflation. Do you see where I’m going here? In this increasing hostile investment environment, any investment strategy will need to take rising interest rates and increasing inflation into account. Elliott Wave Perspective on the S&P500 Those of you who have been reading our daily Special Elliott Wave S&P500 Bulletins have seen first hand how the index has been putting in corrective after corrective wave higher in what still appears to be a bear market rally. Here is trader Ananth Acharya’s Elliott Wave take on where the index appears to be headed. The S&P500, contrary to analysis and expectations, continued to rally higher and in the process stopped just short of the key threshold levels. The rally Thursday and Friday appears to be a Flat (FL) wave formation suggesting we should be heading to lower levels soon.
Thirteen-minute SPX chart showing the current Impulse (IM) wave down from the April 17 high with Double Zigzag (DZ) pattern from April 20 to April 24 which appears to be the top of IM Wave 2 and subsequent target (horizontal histogram on price axis). Chart provided courtesy of Refined Elliott Trader (RET) software produced by Elliottician.com Data by eSignal.com
Daily chart showing the S&P500 from the 1982 low and end of larger degree Wave 5 and beginning of the Flat from the March 2000 high. This alternate count assumes the March 2009 low was the end of FL wave C (with Wave A ending at the October 2002 low and Wave B ending at the October 2007 high) which would mean the beginning of a longer-term bull rally, possibly to new highs. Chart provided courtesy of Refined Elliott Trader (RET) software produced by Elliottician.com Data by eSignal.com We apologize for the small wave labels and are endeavoring to correct this problem.
On the lighter side… Here is our second installment featuring actual answers from a Grade 6 history test. 5. Socrates was a famous Greek teacher who went around giving people advice. They killed him. Socrates died from an overdose of wedlock. After his death, his career suffered a dramatic decline. 6. In the Olympic games, Greeks ran races, jumped, hurled biscuits, and threw the java. 7. Julius Caesar extinguished himself on the battlefields of Gaul. The Ides of March murdered him because they thought he was going to be made king. Dying, he gasped out: "Tee hee, Brutus." 8. Joan of Arc was burnt to a steak and was canonized by Bernard Shaw. 9. Queen Elizabeth was the "Virgin Queen." As a queen she was a success. When she exposed herself before her troops they all shouted "hurrah." Stay tuned for the next installment!Stories of interest this week… Mortgage Investors Form Battle Lines Over Housing Aid http://www.bloomberg.com/apps/news?pid=20601109&sid=aJ6_vwmx_vlA&refer=exclusive Soaring U.S. Budget Deficit Will Mean Billions in Bond Sales http://www.bloomberg.com/apps/news?pid=20601109&sid=anA.WOxto6qQ&refer=exclusive Treasury 10-Year Yields 3% for First Time Since Before Buybacks http://www.bloomberg.com/apps/news?pid=20601110&sid=aaSYyxBbqcbY U.S. Stress-Test Accounting May Raise Capital Levels http://www.bloomberg.com/apps/news?pid=20601110&sid=a2LM0swWIxjA Swaps Man Who Knew Too Much Fights to Salvage World He Lost http://www.bloomberg.com/apps/news?pid=20601109&sid=aAqPKpl2zjkg&refer=exclusive IEA Sees Oil-Supply Crunch by 2013 on Slow Investment http://www.bloomberg.com/apps/news?pid=20601110&sid=abnkGOUOzC3w U.K Financial Bailout Reaches 1.4 Trillion Pounds http://www.bloomberg.com/apps/news?pid=20601109&sid=a0_DlDun684Q&refer=exclusive Icelanders Get Chance to Vent Anger in Early Election http://www.bloomberg.com/apps/news?pid=20601110&sid=aD0vkBDgIh4Q
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