| TSG Weekly Market Watch November 7, 2008 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 09 November 2008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending November 7, 2008Topics Discussed This Week:
Bounce still in play? Leaders move up Q3 earnings – a little better but still deteriorating Manufacturing plummets, jobs losses mount Special Report: The Big Bubble Bust - How smart are attempts to stop it?
Last week
Quote of the week "Overpriced assets are like poison mushrooms. You eat them, you get sick, you learn to avoid them. A credit bubble is different. Credit is the air that financial markets breathe, and when the air is poisoned, there's no place to hide." Charles R. Morris, author of The Trillion Dollar Meltdown (Feb 2008). Bounce still in play? Last week we had a pre-election bounce. This week after the biggest Election Day rally in history (well actually since 1984 when markets were allowed to be open), stocks then registered their biggest two day post-election drop in history. Even though we had a rally Friday, it was anemic from a volume standpoint and in the final analysis, stocks ended down for the week. The poor economic reports didn’t help. But key support levels held and most stocks closed about what they did two weeks ago. Does that mean the rally is still alive? Technically Speaking Leaders move up After gaining 9% last week, Dan’s Sunday pix dropped 8.9% along with the rest of the market. This week Zanger’s list of market leaders grew from four to fourteen that included Apple (AAPL), Sohu.com (SOHU), Apache Corp (APA), CF Industries (CF), Canadian National Res (CNQ), EOG Resources (EOG), Genco Shipping (GNK), Goldman Sach (GS), Holder Oil Services (OIH), Las Vegas Sands (LVS) Valero Energy (VLO), Walter Inds (WLT) and Potash (POT). Google was off the list this week and is now in the fifth week of sitting below a bearish head & shoulders neckline with a slight downward slope at around $400 with far left shoulder starting in late 2006. If the neckline holds as resistance, the minimum target for GOOG is around $100 so a pattern that bears watching.
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 again as we finished the fourth week of a shakeout for the major indexes. So far, 8150 has acted like concrete support for the Dow over that time and no matter how bearish the news, it has not been decisively breached. This is actually bullish as is the fact that stocks dropped this week on lower volume. Market makers will continue to shake this market out until there are no sellers left then try to run prices higher to see what selling they encounter. But they will need help in the way of brighter economic news to help them keep it up for any longer than a few days or weeks. After surging to 81.65 last Monday the Market Volatility Index (VIX) settled to end the week at 56.10 versus 59.89 last week and 79.13 two weeks ago. Extreme VIX readings can often presage at least a temporary market bottom especially when it follows high volume capitulation readings we saw four weeks ago. After dropping to 369.56 last week, the 19 commodity NYFE CRB Index slipped to close at 365.84. Since hitting a high of 611.51 three months ago, the CRB Index is down more than 40% and volatility has remained high increasing the chances of a commodity bounce. Gold has also struggled as the yellow metal gained a little to close at $733.90/oz. up from 719.30/oz last week. A major reason for this weakness continues to be the strength in the U.S. dollar. The U.S. Dollar Index eased again this week to close at 86.11 down from 86.27 last week. Oil weakened again to close at $62.20/bbl. down from $67.48/bbl last week, below its prior 2008 $64.60 low two weeks ago. Oil is down more than 50% from its mid-July high. 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 marginally to 0.37% from 0.24% last week as the Fed continued to pump cash into the market. Credit markets continued to loosen this week as the 3-month London Interbank Offered Rate (LIBOR) slipped again to 2.29% from 3.02625% last week and 3.516% two weeks ago. The Freddie Mac mortgage rates slipped to 6.20% (from 6.46% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) slipped to 5.25% (from 5.38%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 Earnings - a little better but still bad In the fifth week of Q3-08 reporting season with a total of 2618 companies having reported (up from 1837 companies last week), average earnings were -38% (up from -42% last week, -39% two weeks ago, -23% three weeks ago and -13% five weeks ago) versus Q3-07. 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. So far this earnings season, consumer services have seen the greatest declines, with the earnings of 331 companies falling an average 79% from the same quarter last year. We have found that results from a broad range of companies are much more reliable than analysts’ earnings forecasts, S&P500 earnings, earnings surprises and month-to-month changes in seeing the true earnings picture. When earnings are falling for the broad range of companies, it’s a negative indicator of market and economic strength. When they hit a solid bottom and start to rise, it’s very good for both. Economic ReportsManufacturing plummets, jobs losses jump After the bad news last week that the Chicago Purchasing Managers Index had fallen to the lowest reading since 2001, we saw drops in the Institute of Supply Management manufacturing and service indexes: manufacturing dropping to 38.9 in October and services to 44.4. But the biggest hit came Friday with the loss of a further 240,000 jobs in October as the unemployment rate jumped to 6.5%, a 14-year high.
Chart 1 – Both Institute of Supply Management indexes (manufacturing and service) dropped in October with manufacturing falling from 43.5 in September to 38.9 in October (the lowest reading in at least two decades) and serviced dropping from 50.2 to 44.4. More confirmation of how rapidly this economy is cooling.
Chart 2 – Another shock on Friday came with the announcement from BLS that another 240,000 jobs were lost in October. But the real kicker is that thanks to revisions, the economy has lost another 184,000 jobs since June with the original September number of 159,000 losses nearly doubling to -284,000. Since January, the Bureau of Labor Statistics originally reported a loss of 585,000 jobs. With revisions, that number is actually 939,000, 61% worse that initially reported (see horizontal monthly lines to show original number). We also learned that the unemployment rate jumping 40 basis-points to 6.5% to a fourteen-year high to roughly 10 million unemployed with 1.2 million being added to that statistic this year. But since jobs are a long-lag indicator, losses will undoubtedly continue to mount.
Is now the time to buy stocks? Since stocks put in their first so called ‘bottom’ in March, pundits have been trying to convince us that this is another “once in a generational opportunity to buy.” Since the last bottom on October 10, they are again furiously talking their books. But does analysis of stock action that tracks the smart money support this contention? Here we see the action in the Vanguard total market ETF (VTI) which is good gauge of the overall stock market. It is a much better measure of the health of the market since it includes nearly 3500 U.S. stocks with a market cap of nearly $30 billion (September 30, 2008) compared to 500 stocks for the S&P500 and just 30 in the Dow Jones Industrial Average. On October 10, there was a bullish ‘climactic action’ day in which price moved down on very high volume but with the close moving up to close in the mid daily range. This is an example of a selling climax and the fact that the next bar gapped up a closed near the upper end of its range shows professional buying. Next we saw an indication of ‘no demand’ on October 20, a day in which prices moved marginally higher on low volume but where price action occurred in a narrow range. If subsequent bars are also on low volume with a narrow price spread, it indicates a lack of selling which is what happened Next we see a ‘top reversal’ pattern which is a move to a relative high on high demand but with a narrow price spread (difference between high and low) on November 5 followed by a day in which price opens lower and drops into the close on relatively high volume. Figure 2 – Daily chart of the Vanguard total market ETF (VTI) which tracks more than 3000 U.S. stocks showing the recent bearish signals. Chart by TradeGuider.com Data – Realtimedata.com
In other words, based on volume and price action, each time the VTI moved up to resistance there was little commitment on the part of buyers to buy which caused prices to fall. But then as they hit support, there was little commitment on the part of sellers so prices bounced up again. The next test will come as VTI falls toward the lower support line at $42. If volume drops as this level is approached and then reverses on increasing volume it will be bullish. However, if we see volume pick up and price drop below $41 on increasing volume, it will mean support has been decisively broken and to expect lower prices ahead. It is well and good to believe that valuations are attractive but valuations will be attractive all the way down in a bear market. At this point, it is too early to conclude that we have hit bottom and the best approach is to remain neutral. From a technical point of view this chart pattern is called a bearish flag pattern which occurs quite regularly in bear markets, so if anything a bearish move from here seems more likely. But it won’t be until we see a move in either direction; either breaking through resistance at the top red dashed line or blasting through support on rising volume, that it will be the time for action. How the professional money is reacting will provide the lead for those who know how to decipher the signals. Also be sure to read our latest Special Report: The Big Bubble Bust - Just How Smart are Attempts to Stop It? Stories of interest this week… Fed Balance Sheet Swells Above $2 Trillion http://www.reuters.com/article/marketsNews/idUSN0640103620081106 NYC Commercial Property Sales Plunge in Credit Freeze http://www.bloomberg.com/apps/news?pid=20601087&sid=aEJwkP6e4q8U&refer=home Democrats Set to Take On Stimulus Bill as Price Rises http://www.bloomberg.com/apps/news?pid=20601110&sid=aXUnWNKW7P5I Credit Card Bond Sales Plunge to Zero, First Time in 15 Years http://www.bloomberg.com/apps/news?pid=20601087&sid=aajOmDkW3xeE&refer=home Credit Swap Disclosure Obscures True Financial Risk http://www.bloomberg.com/apps/news?pid=20601109&sid=aKKRHZsxRvWs&refer=home BOJ Helpless as Yen Rises on Carry, UBS, Barclays Say http://www.bloomberg.com/apps/news?pid=20601109&sid=aJ.S4s.NPFWo&refer=home Zero Rate World May Lie Ahead as King, Trichet Cut http://www.bloomberg.com/apps/news?pid=20601109&sid=ayE0YPzpdD38&refer=home Dollar Libor Drops as Central-Bank Cash, Rate Cuts Thaw Lending http://www.bloomberg.com/apps/news?pid=20601087&sid=aRy8JDku20vI&refer=home BRICs See No Relief Even as Rally Lures Stock Bulls http://www.bloomberg.com/apps/news?pid=20601109&sid=aZwI8vU6TNwo&refer=exclusive Iceland Bank Swap Sellers Face $7 Billion of Losses http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5vSoPAChDrk --------------------------------------------------------------------------------------------------------------------- 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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