| TSG Weekly Market Watch March 20, 2009 |
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| Written by Matt Blackman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Saturday, 21 March 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending March 20, 2009Topics Discussed This Week:
Rally just keeps on going… Leaders fall behind Earnings – Yup, still getting worse Net Treasury capital outflow hits a record Builder’s sentiment bearish despite blip in starts We’re still in sell mode Elliott Wave says rally will keep going
Last Week
Quote of the week "Everyone is saying that we're going to go back and test the lows, but you know, the market doesn't usually reward the consensus view." — Craig Hodges, portfolio manager for Hodges Capital Management. Rally just keeps on going… It was certainly a week of news driven markets. First there was dancing on Wall Street when news was released Tuesday that housing starts jumped 22% causing the market to rally nearly 180 points. Clearly investors had no intention of looking this gift horse in the mouth. Maybe it had something to do with the luck of the Irish and all that green beer being poured in pubs in New York… It was clear that everyone was getting sick of bad news and had chosen to simply ignore it. Even the rather depressing language from Bernanke and crew in the FOMC interest rate decision statement failed to do much damage. But then as the week drew to a close, the Dow fell on Thursday and Friday which probably had more to do with the fact that it was triple witching week as a number of options and futures contracts expired. But the Fed also played a rather part. We learned this week that on top of trillions in bailouts for Wall Street and more recently Main Street mortgage holders, a new plan was afoot. However this week’s announcement to expand purchases of mortgage backed securities and GSE fixed income securities (from Fannie Mae and Freddie Mac), and start buying $300 billion in US Treasuries and monetize government debt brought about the expected reaction. One would have thought that this bailout bonanza would have had a depressing effect on the US dollar but up until recently the reverse has been true. However, the 4.9% drop in the greenback on Wednesday and Thursday after the Fed announcement demonstrated that the move caught many off-guard. There is an undeniable reality is that even if the stock market rally continues the never-ending stream of ‘stealing from Peter to pay Paul’ policies to stem further economic and market declines in the final analysis will have the opposite real effect. We got a hint of that this week as the price of oil and most other commodities moved strongly higher making the current economic pain even worse for those most adversely impacted by the meltdown. As many prescient forecasters have warned, policies that further compound already extreme levels of debt and the ultimate taxpayer burden only increase the probability of a U.S. malaise similar to that which has plagued Japan since 1990.
Technically Speaking Leaders soar with the pack This week Dan’s Sunday March 15 portfolio of 10 stocks to watch was rich with financials and included Apple, (AAPL), Buckle (BKE), Cree (CREE), Goldman Sachs (GS), Life Tech (LIFE), Mastercard (MA), Morgan Stanley (MS), PNC Financial (PNC), Sohu.com (SOHU), and Wells Fargo (WFC). But this time, this group lost ground while the major indexes moved marginally higher. This 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. Although weekly volumes were again above average although indexes moved higher, the biggest volume occurred on down days. As we said last week, rallies require steadily increasing volume to remain strong and falling volume when prices rise indicates declining interest from buyers. Increasing volume on down days is also bearish. The Market Volatility Index (VIX) spent the first two days falling then rose through the rest of the week to close at 45.89 up from 42.36 last week. A rising VIX on rising prices is bearish as it shows fear creeping back into the market in spite of rising prices. Since rebounding off its December 5 bottom, the 19 commodity NYFE CRB Index has been moving higher and it gained more ground again this week to close at 372.87 up from 354.30 last week and 351.55 two weeks ago. 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 surged to $955.70/oz this week up from $928.50 last week. But as we have mentioned in past weeks, volume and open interest continue to decline which is bearish, especially given the recent potential double top three 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 lost 4.6% this week dropping to 83.73 down from 87.36 last week and 88.59 two weeks ago. Since bottoming in July, the U.S. Dollar Index has paired its gain to 17%. Crude oil futures firmed again this week to close at $52.07/bbl up from $45.73 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 1782, down from 2122 last week and 2225 two weeks ago. A continued increase in the BDI is bullish for the economy and oil prices but it appears to have lost momentum at least for the time being. 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 0.23% (from 0.19% last week). Meanwhile, the 3-month London Interbank Offered Rate (LIBOR*) slipped to 1.22281% (down from 1.31563% last week). This compares to LIBOR 52-week high of 4.81875% last October. Meanwhile Freddie Mac mortgage rates slipped this week to 4.98% (from 5.03% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) firmed to 4.91% (from 4.8% 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 3409 companies having reported so far in the eleventh week of Q4-08 earnings reporting season (up from 3243 last week), the net loss on continuing operations widened to ($219.2) billion (from ($205.6) billion last week) versus +$121.9 billion in Q4-07 which works out to a change of -279.7% from Q4-07. This compares to -266% last week, -262% two weeks ago and -46% in the opening week of reporting season. The final result for Q3-08 was -62% from Q3-07. 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 Treasuries point to trouble on the horizon
We learned on Monday that monthly net Treasury International Capital (TIC) flows, the amount of foreign money flowing into or out of Treasuries, hit a record outflow in January of $148.9 billion in January versus an inflow of $86.2 billion in December. Monthly net TIC flows is the most comprehensive category contained in the reporting data set and includes nonmarket flows, short-term securities and changes in banks' dollar holdings. As we see from the chart, Treasury will need to net more than $160 billion in Treasury sales every month (indicated by the horizontal orange dashed line – a line that has rarely been reached on an individual monthly level let alone as an average). Also note that the amount of money flowing into Treasuries has been steadily falling as indicated by the yellow trend line. According to the Wall Street Journal, China remained the largest holder of U.S. Treasury securities, having surpassed Japan late last year with holdings totaling $739.6 billion, followed by Japan's $634.8 billion and $186.3 billion among oil exporters according to the Wall Street Journal. But the total held by these three groups pays just nine months of the US government’s current annual budgetary needs of the estimated $2 trillion annual deficit in 2009! Builder’s sentiment bearish despite blip in starts
We also learned Monday that National Association of Home Builder’s sentiment was little changed in March at 9, exactly where it was in January.
Then on Tuesday, an unexpected 22% jump in February housing starts helped push the Dow up 179 points as investors hoped again, that it represented the start of a bottom. Unfortunately, a closer look revealed the folly in this assessment – a proposition supported by the poor showing from the most recent NAHB survey. If there is any improvement in the housing industry, the builders don’t seem to know anything about it. As we have said before, starts lag permits and February permits were up a meager 3% indicating that builders were probably just getting homes started before the permit period expired. It is also the beginning of the important spring building season, a time in which permits and starts should spike higher. So while it was good to have at least a temporary respite from the bad housing news, using this as an excuse to call a housing market bottom would be foolhardy. Also as you can see from the chart, there have been a number of similar “fake ups” before in both permits and starts which were shortly followed by a strong reversion to the down trend. One last point – it’s not the shortage of new homes on the market that is the problem. It’s the shortage of new home buyers. Adding more new home inventories without an increase in buyers will only make the inventory situation worse. Synopsis Still in sell mode The sell signal issued Tuesday March 10 is still in play so we are staying on the sidelines for now. Elliott Wave says rally heading higher… We remain in a corrective Elliott Wave pattern which can be messy affairs. Our count starts from March 10 and shows an Impulse Wave currently in the process of finishing Wave 5. Assuming the Impulse is a Zigzag, we expect another corrective pattern following the end of Wave 5 to then be followed by a second Impulse pattern that is projected to take us up to around 850 or so for the S&P500. We won’t have a definite target until this Impulse finishes and the corrective wave that follows runs its course.  We expect to see this rally continue but as we are in a Wave 4 of smaller degree Impulse, there is a chance the prices may go lower before the next Impulse wave begins. But looking at the broader picture, prices should continue to trend higher until the next Impulse wave runs its course. On the lighter side…Before you criticize someone, you should walk a mile in his or her shoes. That way, when you criticize them, you're a mile away and you have their shoes.
Stories of interest this week… CBO Projects 2009 Deficit Will Reach $1.85 Trillion http://www.bloomberg.com/apps/news?pid=20601087&sid=a3FY84ILxIUc&refer=home Fed to Buy $300 Billion of Longer-Term Treasuries (Update4) http://www.bloomberg.com/apps/news?pid=20601087&sid=aeP8.XnGrN64&refer=home Naked Short Sales Hint Fraud in Bringing Down Lehman http://www.bloomberg.com/apps/news?pid=20601109&sid=aB1jlqmFOTCA&refer=home U.S. Industrial Production Fell 1.4% in February http://www.bloomberg.com/apps/news?pid=20601068&sid=aKo5Ol3aQgO8&refer=home U.S. Economy: Housing Starts Unexpectedly Increased in February http://www.bloomberg.com/apps/news?pid=20601068&sid=abdvnB6vu80E&refer=home Bernanke Says Fed Aims to Ease Credit-Market Strains http://www.bloomberg.com/apps/news?pid=20601087&sid=aAWzQMDmmdhk&refer=home U.S. Officials Urge TARP Recipients to Comply With New Visa Law http://www.bloomberg.com/apps/news?pid=20601087&sid=aoC8hgygmC8c&refer=home Geneva Banks Face ‘Creative Destruction’ in Losing Secrecy http://www.bloomberg.com/apps/news?pid=20601109&sid=a7QiEJj.PYTs&refer=exclusive Rich Head for the Caymans When Tax Rates Go Up: Caroline Baum http://www.bloomberg.com/apps/news?pid=20601039&sid=aMN8U14Ha8Mk&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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