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.
December 2009 Wrap-Up
January 19th, 2010
The broad market continued its dazzling recovery throughout December as grand predictions and a visible inability of any negative news to “stick” deepened the bulls’ convictions. Bears, on the other hand continue to walk around, dazed, trying to explain the often irrationality of market momentum. Resilient is a good description of the past month as well as the past ten months. While Economic statistics have dramatically slowed their deterioration and in many cases, shown evidence of upward trend reversal in recent months, the markets have decided and bet accordingly that the economy is just fine and will most certainly NOT see a double-dip recession. Time will tell.
From the 2009 lows in March, the major averages and sector indexes performed as follows for the remainder of 2009.
Dow 30: +61.18% Cons. Discretionary: +89.01% Healthcare: +44.45%
S&P 500: +67.23% Cons. Staples: +37.63% Industrials: +86.26%
Naz100: +78.81% Energy: +43.76% Materials +86.44%
Ru2000: +82.55% Financials: +146.95% Technology: +86.22%
Utilities: +39.74%
Several observations can be made from that magnitude of performance. An obvious one is that some major catalyst must have been put into place to not only spark but maintain that rally. Our contention is that the catalyst was widespread belief that the Fed would (and will) continue to liquefy the entire financial system. This belief further entrenched market bulls and re-affirmed the thesis that all dips are buying opportunities.
Longevity of the both the Fed’s accommodative policies and investors emboldened bullishness are question marks. One very clear data point is that investors are expecting big things from Q4 2009 earnings.
The Economy
· Final Q3 GDP came out on December 22 at +2.2%; significantly below Advanced Q3 GDP of +3.5% and Preliminary Q3 GDP of +2.8%. Several economists pointed out that revision from the second to third estimates are not commonly significant. While the general take-away was that the downward revision was “surprisingly large”, consensus for Q4 remains “around” 4%. The initial estimate for Q4 comes out on January 29.
Employment
· On January 6, ADP reported November Employment of -84,000 (est. was -75,000). This was the ninth consecutive monthly improvement in the series but also the twenty-third consecutive month of job loss.
· On January 8, the government reported Non-Farm payrolls for December at -85,000 (est. was unch’d). However, November’s surprisingly strong -11,000 jobs was revised slightly higher to show +4,000. This was the first gain in jobs in the past twenty-four months.
· Unemployment remained at 10.0%…as it was in November.
The Market
Since GDP and Employment, Dow 30 and S&P 500 are up approximately 1%, Ru2000 is up about 0.50%, and Naz 100 is flat. January window dressing has largely run its course and now investors are rolling up their proverbial sleeves to dive into earnings reports. With the major averages and sectors indexes up an additional 1%-5% since January began, expectations for strong earnings reports and guidance are presumably very high. We believe that even slightly cautious comments on forward guidance could be taken as significantly bad news by investors who have come to expect all news to be good.
November 2009 Wrap-Up
December 11th, 2009
There have been many surprises over the past month; both positive and negative. As has been the case over the past few months, bulls and bears are increasingly frustrated. The broad market seems to have shifted into neutral and has made no sustained progress since mid-November. Bulls call it a natural consolidation in a healthy bull market. Bears call it a growing inability to climb measurably higher. There has been a noticeable shift in overall market psychology in terms of response to news; especially Economic news. A tendency to “sell the news” has begun to emerge which drives the bull camp crazy. Then, just after a bit of downside momentum starts to intensify, the bears hardly get started into their victory lap before a low-volume rally forms.
The Economy
· Preliminary Q3 GDP came out on November 24 at +2.8%; significantly below Advanced GDP of +3.5% which came out on October 29. When Advanced Q3 GDP came out, the S&P 500 was at 1042.63; up 56.4% from the 2009 low on March 6. Presently, the index is up 4.4% since the first estimate of Q3 GDP which suggests that the market may have priced in a strong GDP report. With the second estimate of Q3 coming in weaker than the initial one and Final Q3 GDP coming out on December 22, markets may be disappointed.
Employment
· On December 2, ADP reported November Employment of -169,000 (est. was -155,000). This was the eighth consecutive monthly improvement in the series but also the twenty-second consecutive month of job loss.
· On December 4, the government reported Non-Farm payrolls for November at -11,000 (est. was -190,000); the twenty-third consecutive month of job loss.
· Unemployment came in at 10.0%; down from October’s 10.2%
The Market
A lingering concern is how the market and economy will perform once all the government programs are withdrawn. In recent weeks there have been rumblings that “some” of the programs will “soon” be wound down. But those comments are quickly followed with the ominous warning that “we are not out of the woods yet”. The flagship bailout program, TARP (Troubled Asset Relief Program), was set to expire on December 31, 2009. Today, Treasury Secretary Geithner told Congress that the administration is extending TARP to its legal maximum duration which is October 3, 2010, according to Bloomberg. Mr. Geithner said, “The Treasury may expand the Federal Reserve’s Term Asset-Backed Securities Loan Facility, an effort to jumpstart securitization markets, as well as continue using TARP to help struggling homeowners and small companies.”
Investors are being told that “all is well” and the stimulus/bailout/rescue initiatives are working like clockwork. Today, the administration’s move to extend the proverbial safety net just in case something unforeseen happens does not convey a lot of confidence about the underlying strength of the recovery or the market’s ability to handle a negative surprise.
There is an interesting correlation that is sending a very loud message. The CBOE Volatility Index (VIX) and the broad markets are inversely correlated. While the VIX is typically referred to as a “fear gauge”, it can be equally viewed as a “complacency gauge”. From July 2007 to September 2008, VIX repeatedly found support in the 16-20 area. During the same time, the S&P 500 set a new all-time high and then drifted into a 17.5% decline. Over the next six months, the index accelerated into a 48.6% decline. Since October 21, the VIX has been testing the 20 area as support again; where the index was before the most intense problems emerged in 2008.
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