May 11, 2010: Macro Market Reflections
May 11th, 2010
· During the two weeks (ten trading days) from April 26 to May 10, investors were bluntly but vividly reminded about various areas of market risk. An errant trade in PG allegedly kicked off a firestorm of computer-driven selling. During that window, major averages declined as follows: Dow 30: -12.33%, S&P 500 -12.63%, Naz 100 -14.91%, and Ru 2000 -14.51%.
· On Friday, a recovery in response to a stronger-than-expected BLS Employment number drove some stabilization and the averages closed relative to their respective April 26 bull market highs as follows: Dow 30 -7.80%, S&P 500 -8.93%, Naz 100 -10.20%, and Ru 2000 -12.46%.
· Russell 2000 was the second weakest of the four averages on the way down but staged the weakest recovery by Friday’s close. Naz 100 has been the strongest since index since its May 9 low with 11.20% rally while the S&P 500 has been the weakest from its May 9 low with an 8.93% rally.
· Currently, the Russell 2000 is up 11.86% for 2010 and up 104% from its bear market low fourteen months ago. The index set its bull market high on April 26 (as did the other major averages) at 745.95. Beginning in August 2007, the 750 area began to emerge as an important technical area. On August 6 and again on August 16, the index traded down through 750 reaching a low of 736 on August 16. That low reversed into a seven-week, 15.8% rally.
· The 750 area attracted buyers again in November and December as the index bottomed at 734.40 on November 27. The following rally, however, was a far less intense 8.9% over a four-week period.
· In June 2008, the role of 750 appeared to change from support to resistance. After three weeks of trying to break out up through 750 in May-June 2008, the index reached 763.27 on June 5. The index declined 15.2% over the next six weeks. The August 15 peak was 764.38 and the September 19 peak was 761.78. From the September peak, the index declined 55.03% over the next six months.
We believe the index remains extremely vulnerable to a meaningful and sustained downside reversal. The market assigned a great deal of value to the 750 area (734-764) during August 2007 to September 2008. Based on the index’s price action beginning in September 2008, our view is that index is very near significant resistance. We recommend using this strength to dramatically reduce exposure to Ru 2000 names. Technically, we believe there is risk down to the 550-575 area.
March 2010 Market Wrap
April 7th, 2010
· Following February’s recovery from a meager sell-off attempt, March continued and extended the on-going bull trend as all four major averages (Dow 30, S&P 500, Naz 100, and Russell 2000) closed the month solidly in positive territory for the second straight month.
· All nine S&P sector indexes gained in March which brought eight of the nine sectors into positive territory for 2010. Three of the sectors were up over 10% for the year as the close of Q1.
· Beginning in March, Russell 2000 emerged as the best performing major average by posting a 7.97% gain with the Naz 100 being the second strongest index with a 7.68% gain for the month. That leadership position has been increasingly strong in the early days of April. The index is up 2.10% for April (+10.80% for 2010). The second strongest index is the S&P 500 which is +0.59% for April (+5.50% for 2010).
· All four major averages set new recovery highs in March by trading up through their respective January highs. April has extended those trends and current margins (at cycle highs set during April 6-7) above their respective January highs are: Dow 30 +2.41%, S&P 500 3.59%, Naz 100 +4.74%, and Russell 2000 +8.27%.
· Russell 2000 was the first index to eclipse its January peak which happened on March 2. That was followed by Naz 100 (March 9), S&P 500 (March 12) and Dow 30 (March 17).
Performance from the bear market lows through March 31 for the major averages and for the S&P sectors has been:
Dow 30: +67.8% S&P 500: +75.38% Naz 100: +92.21% Ru2000: +98.09%
Con. Disc: +108% Cons. Stpl: +44.57% Energy: +43.88% Fincls: +173.67%
Hthcare: +48.63% Industrls: +109.45% Materials: +90.93% Tech: +91.82%
Utilities: +33.29%
The Economy
· Final Q4 GDP came out on March 26 at +5.6%; below the consensus estimate of +5.9% and below the lowest estimate in the expected range of +5.7%-+6.0%. This was the lowest of the three estimates of Q4 growth. Advanced Q4 GDP was +5.7% which was followed by Preliminary Q4 GDP at +5.9%. Real GDP grew by 0.1% year-over-year in Q4 after falling by 2.6% in Q3 on a year-over-year basis. Advanced Q1 GDP comes out on Friday, April 30.
Employment
· On March 31, ADP reported March Employment of -23,000 (est. was +40,000). February Employment was revised from -20,000 to -24,000. The February revision took the job loss figure below January’s level which ended a streak of monthly improvements in the series at eleven. March was the twenty-sixth consecutive month of job loss. In the ADP press release, the following comment was included.
Since employment as measured by the ADP Report was not restrained in February by the effects of inclement weather, today’s figure does not incorporate a weather-related rebound that could be present in this month’s BLS data. In addition, today’s figure does not include any federal hiring in March for the 2010 Census. For both these reasons, it is reasonable to expect that Friday’s employment figure from the BLS will be stronger than today’s estimate in the ADP National Employment Report.
· On April 2, BLS reported Non-Farm payrolls for March at +162,000 (est. was +200,000). February was revised to show -14,000 jobs (previously reported at -36,000) and January was revised to show +14,000 jobs (previously reported at -26,000). Long-term Unemployment (those unemployed for six-months or longer) expanded by 6.75% over February’s level. Also, Involuntary Part-Time workers (part-timers who want to be full-time) expanded by 3% in March.
· Unemployment came in at 9.7% (est. was 9.7%).
What’s Next?
The promise of census hiring began to come through in March as approximately 48,000 of the 162,000 jobs added were temporary census workers. Temporary is an important part of that equation. While market participants have been enthusiastically cheering the string of less-bad employment-related news, consistent job growth has been the missing element and has also been one of the most relied-upon tenets of the bearish thesis.
As the 162,000 number crossed the tape (on a closed day for equities in observance of Good Friday), reaction in the futures market was surprisingly subdued. That response and the market’s response since suggests that investors are more than willing to “sell the news” of a strong jobs number. Lengthy anticipation of job growth has propelled market psychology, seemingly with each passing month, into a place of heavily-skewed optimism. In addition to the headline disappointment, it seems that investors are at least considering the idea that temporary job growth is just that….temporary
February 2010 Market Wrap
March 17th, 2010
After a somewhat surprisingly weak January, February brought the bulls back. For the S&P 500, there were twelve up days and seven down days in February. On the up days, the headlines were something along the line of, “Stocks Rally as Concerns about Greece Fade” or “Stocks Rally on Economic Optimism”. On the down days, headlines were just about the opposite. There was a three-day period early in the month during which the Major Averages fell to their 2010 lows (so far). At their extremes, these corrections from the 2010 highs were: Dow 30 -8.34%, S&P 500 -9.21%, Naz 100 -9.68%, and Russell 2000 -10.58%. These were similar corrections to what occurred in June-July 2009 when the Major Averages corrected as follows: Dow 30 -8.91%, S&P 500 -9.09%, Naz 100 -7.74%, and Russell 2000 -11.63%. It seemed that as soon as one of the Major Averages reached a 10% correction level (again), buyers decided (again) that 10.58% was enough of a pull-back and sentiment abruptly improved as the “glass is full and spilling over” crowd took charge once again.
Following the 2010 lows on February 5, the Major Averages reversed and have rallied as follows: Dow 30 +7.91% (March 9 high), S&P 500 +9.93 (today), Naz 100 +12.13 (today), and Russell 2000 16.71% (today). Naz 100 and Russell 2000 set new bull market highs today and the S&P 500 is quite close to a new bull market high.
Looking at the broader “health” of the Averages, Naz 100 is the most technically entrenched in its bull trend. 1773 is a 61.8% upside retracement of the 2007-2008 bear market (cycle low came on November 21, 2008). The index traded up through 1773 on October 21, 2009. As for the Russell 2000, 660 is the 61.8% upside retracement level of its 2007-2009 bear market (cycle low came on March 5, 2009) and the index traded up through this level on March 5, 2010. These levels for the S&P 500 and Dow 30 are 1229 and 11,246, respectively. As positive as the downside non-confirmation was when three of the four Major Averages held above their 10% correction levels, stalling and reversing down from well-below respective 61.8% retracement levels for the Dow 30 and S&P 500 could turn out to be equally negative.
The Economy
· Preliminary Q4 GDP came out on February 26 at +5.9%; above the consensus estimate of +5.7%. In stark contrast to Q3 when Preliminary and Final estimates progressively contracted, Q4 Preliminary GDP expanded from the Advanced estimate of +5.7%. The strength, according to Bloomberg, came primarily from “a slowing pace of inventory destocking, a deceleration in imports and an upturn in non-residential fixed investment.” In essence, demand did not pick up but general production did (slowing pace of inventory de-stocking). Final Q4 GDP comes out on March 26.
Employment
· On March 3, ADP reported February Employment of -20,000 (est. was -20,000). January Employment was revised from -22,000 to -60,000. This was the eleventh consecutive month-over-month improvement in the series but also the twenty-fifth consecutive month of job loss.
· On March 5, BLS reported Non-Farm payrolls for January at -36,000 (est. was -50,000). December and January numbers were revised with an aggregate effect of 35,000 fewer jobs lost than previously reported.
· Unemployment came in at 9.7% (est. was 9.8%).
What’s Next?
Optimistic and hopeful remain the operative words and best description of current investor sentiment. Jobs data coming in “less-bad” than expectations have, so far, kept the bullish camp quite content. Expectations are growing, almost by the day, that jobs will be growing by leaps and bounds any month now. At some point (we think that point will be sooner than later), investor’s collective patience in waiting for job growth will simply run out.
January 2010 Market Wrap
February 24th, 2010
January most likely caught everyone by a bit of a surprise. The Major Averages posted losses that ranged from 3.46% (Dow 30) to 6.41% (Naz 100). Two sectors that were beneficiaries of upside momentum in 2009 (Materials and Technology), lost 8.66% and 8.45%, respectively, in January. By contrast, in 2009 Materials gained 45.22% and Technology gained 59.92% making these sectors the strongest, by far, for the year. Healthcare was the only winning sector in January with a 0.42% gain and is presently among the least weak for February. Interestingly, Healthcare and Consumer Staples have the reputation of being defensive and somewhat of a hedge against broadly falling stock prices. Whether or not the sector trends are accurately predicting the next market phase is yet to be determined. What is becoming clear is the changing tendency and willingness of investors to “sell the news”. That sentiment was mostly absent during March-December 2009.
Three of the four Averages set their highs for the month on January 19 while Naz 100 set its high on January 11. All four Averages set their lows on the final day of the month and posted declines from the monthly highs as follows: Dow 30 -6.39%, S&P 500 -6.85%, Naz 100 -8.61%, and Ru 2000 -7.49%. February lows across the board are already below January lows indicating intensifying distribution.
While a bout of profit-taking should not be surprising given the furious rally from March 2009, there are increasing tensions developing with China over our dealings with Taiwan as well as growing concerns regarding the government’s ability to deftly unwind the massive emergency liquidity programs. Interest rates have to rise and the programs have to be unwound. The question is how investors will, both domestically and globally, react to the US markets when either or both of the inevitable “deliquifying” processes begin.
The Economy
· Advanced Q4 GDP came out on January 29 at +4.5%; below the consensus estimate of +5.7% but the second straight quarter of GDP expansion after a record four consecutive quarters of GDP contraction. Final Q3 GDP was the lowest of the three estimates so these data are subject to significant change. Preliminary Q4 GDP comes out on February 26.
Employment
· On February 3, ADP reported January Employment of -22,000 (est. was -30,000). This was the tenth consecutive month-over-month improvement in the series but also the twenty-fourth consecutive month of job loss.
· On February 5, BLS reported Non-Farm payrolls for January at -20,000 (est. was unch’d). There was a wide array of revisions to 2009 Employment data that showed eleven negative revisions and one positive revision. The net effect was an additional 617k more job losses in 2009 that previously reported.
· Unemployment edged down to 9.7% (est. was 10.1%).
The Market
During the rally since March 2009, the longest period of correction is four weeks for Dow 30, S&P 500, and Naz 100 while Ru 2000’s longest corrective period is five weeks. These periods occurred in the June-July time frame when the Averages lost between 7.74% (Naz 100) and 11.63% (Ru 2000). From the 2010 highs three weeks ago (four weeks for the Naz 100), the Averages posted declines (at February lows) ranging from 8.34% (Dow 30) to 10.58% (Ru 2000). From a time and loss magnitude perspective, the broad market is at a critical juncture of psychological support.
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