August 31, 2010: Bracing for Fall (the season, that is)
August 31st, 2010
We live in an age in which anyone with a computer can write articles that span the world with the push of the “enter” key. The investment world has always operated with and as a result of mountains of information; even when that information did not flow all that fast. Completely open flow of ideas and opinions is a great thing for a mature, thinking society.
A recent pair of opinion articles really caught my eye.
On August 28, MarketWatch ran an opinion piece called, “The Death of Equities, Part 2?” which was an opinion on the opinion piece from the New York Times on August 27 in which the author reflected upon a 1979 Business Week cover story called (not-surprisingly), “The Death of Equities”.
The NYT article, in a cursory fashion, discussed some of the fears investors were facing in 1979 such as: economic uncertainty, acute indecision in the market which showed itself through hyper-volatility, geo-political worries, and a seemingly non-stop exodus of money from the market. After reminding the reader that it was “only” three years until THE market bottom was established, the article ended with an ominous warning for anyone who has been selling as of late. “It would be a sad twist if people were to mirror their recent excessive risk-taking with excessive caution now”.
The MarketWatch opinion piece had a fascinating comment as it basically said the same thing as the NYT piece in that a warning was issued for anyone who has been bearish or skeptical on the prospects of the next trend phase for the market. This piece ended with the following: “Is there a new bull-market ahead? Who knows? But articles like the front-page story in last Sunday’s Times (Aug 27 article) are one sign we may be much closer to the end of this long bear market than the beginning.”
The Major Averages (Dow 30, S&P 400, 500, and 600, NASDAQ 100, and Russell 2000) are 55% to 81% above their respective bear market lows from 2008-2009. The S&P Financials is the only sector index to be officially in bear market territory (down 21.5% from its recent peak). Even still, the index is up 131% from its bear market low.
Comparing 2007’s peaks (all-time highs for three of the four Averages) to 2010’s recovery highs reveals some interesting technical data points. The recovery highs for the Dow 30 and S&P 500 were below bear market thresholds relative to 2007’s highs. The Naz 100 and Russell 2000 blasted right up through their bear market thresholds and came within 8% and 12.9%, respectively, of their 2007 highs before reversing lower. If the “long bear market” comment was in relation to 2007’s all-time highs, then I would agree…we are in a long bear market. But looking at the returns from 2008’s-2009’s lows, it seems that “the market” has priced in a superb recovery and on-going good economic and corporate news.
Bear? Bull? It truly depends on your perspective. However, with the major averages down 20%-33% from 2007’s bull peaks but also up 55%-80% from their recent bear market lows, the broad market could be closer to an important top than it is to an exasperated market bottom.
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August 12, 2010: It’s All Up to the Consumer Now
August 12th, 2010
As investors are catching their breath after yesterday’s drubbing of the bulls, focus is now on tomorrow’s July Retail Sales report. Consensus is for +0.5% for headline and +0.2% for ex-auto.
Yesterday’s price action was a stark reminder of just how much good news is priced into the market at current levels. The sell-off can be (and has been) blamed on many culprits but the Fed’s darkened view of the so-called recovery dealt a severe punch in the gut to the bullish camp. Some of yesterday’s technical carnage includes:
The major averages (Dow 30, S&P 500, Naz 100, and Russell 2000) dropped back into negative territory for the year.
The major averages all knifed back down below their 200 Day Moving Averages.
The Naz 100 and S&P 500 fell back below their 10% correction levels which are 1853 and 1098, respectively. That leaves only the Dow 30 (and two of nine S&P sectors) above their 10% correction levels.
Portfolio managers, traders, strategists, analysts, and anyone else who lives in the markets each day have been trying to interpret the message and meaning of the extreme volatility we have seen since the increasingly infamous “flash crash” of May 6, 2010. The lightning speed at which “the market” changes its collective mind is not an indication of bullish market sentiment, in our estimation. Rather, it shows that investors are becoming more short-term oriented and are quite content to sell into strength.
Today before the open, we got weaker-than-expected New Unemployment Claims but Continuing Claims were not as weak as expected. We also got July Import and Export Prices…both were weaker-than-expected. June Export Prices were revised from -0.2% to -0.7%. Add to that the -0.2% report for July (est. +0.1%) and the deflation argument becomes much more plausible.
Recent Consumer Spending data has not been as weak as estimated and there is likely to be at least some impact from back-to-school shopping so we could see some strength in Retail Sales. We would, again, strongly urge a sell into strength approach.
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August 9, 2010: Pick an Adjective
August 9th, 2010
Resilient is the one word that comes to mind most often when market-watchers speak their minds. Friday was a perfect example of the underlying hope, despite headline data, that the job market (and economy in general) really is getting better. What was probably most interesting was how the digital (print) media largely spun the BLS Employment report. “71,000 Jobs Added in July” was the message seen by headline readers. The full number for July was -131,000 (est. was -70,000). The private sector added 71,000 (est. was +100,000). Add in the 97,000 more jobs lost in May and June than originally reported and July’s report does not offer much in the way of good news.
Futures dropped immediately and the market was extremely weak for the first ninety minutes of the day. Then, investors remembered that every recent decline has quickly been bought. Further, the bullish thought process went, with a FOMC meeting next week, how likely is it that we’ll get more bad news? So, shortly after 11:00 AM on Friday, the market firmed and clawed back most of the morning losses by the session close. For short-term tactical traders, that was a neon sign instructing investors to keep on buyin’…at least until sellers show up with any sustained conviction.
Resilient? Persistently cheap? Strong bull trend? There is a dictionary full of descriptive phrases for recent price action.
Despite the market looking past Friday’s hideous Employment report, there still are some significant technical hurdles that need to be cleared. One is that the Russell 2000 remains stubbornly below its 10% correction level (671.36). If the recovery is truly sound, one would expect strong leadership from the Russell 2000. While the index is the strongest of the major averages for 2010 (up 4.93%) and also produced the strongest rally from its 2009 bear market low (117.74%), it was also the only of the major averages to officially enter bear market territory (down 21.22% from its bull cycle high).
Another technical hurdle is the S&P 500’s current challenge of a potentially major resistance barrier. 1115.36 and 1140 are respective 50% and 61.8% upside retracements of 2010’s range. These are significant because 2010’s “correction” of 17.12% is by far the steepest since the bull trend began in March 2009. Mixed in there also is 1121.44 which is a 50% upside retracement of the 2007-2009 decline. The index continues to struggle with its 200 Day Moving Average (1115.39) as resistance. May 21, 2010 was the first full day spent below the Average since May 29, 2009. Since May 21, 2010, there have been five days (assuming today’s low holds above 1115.39) during which the index has spent the day entirely back above the Average.
We continue to believe a tremendous amount of good news is priced into the market at current levels. If the Fed blinks and does not come through with precisely the right accomodative language tomorrow, short-term momentum could quickly turn negative.
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July 26, 2010: Housing Inventory at a 42 Year Low?
July 26th, 2010
That’s right…good news, real-estate owners and investors….in the latest government report on New Home Sales (for June) which came out this morning at 10:00 EST, sales spiked 23.6% from May’s level.
Just to fill in some gaps….
May’s New Home Sales figure was originally reported at 300,000 (seasonally adjusted annual rate) which was the lowest rate on record, according to Bloomberg. Even that figure did not tell the whole story. In today’s report, May’s record low pace of 300,000 was revised to 267,000. Further, April New Home Sales were revised down from 504,000 to 422,000 and March New Home Sales were revised down from 411,000 to 384,000. That makes the total downward revision during those three months 142,000 or 11.69% lower than what was originally reported.
Comparing revised and original data to prior month’s revised and original data shows the following: March’s sales grew by 10.7% (originally reported at +33.4%), April’s sales grew by 9.9% (originally reported at +22.6%), and May’s sales were -36.7% (originally reported at -40.5%).
Still, June’s sales of +23.6% is a gain rather than a loss and despite June New Home Sales being the second slowest pace on record, investors are keenly focusing on good news and aggressively explaining away bad news.
According to Reuters, the sales spike in June took available inventory to a 42-year low of 7.6 months. Given that the three months prior were substantially revised lower, it’s anyone’s guess whether or not June data is “real”.
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