Being Prudent is Boring … but Prudent

Wednesday, April 25th, 2012

Even in a downtrend since late March, the market is not making it easy for those awaiting this pullback.  Selling bouts are met with oversold bounces quite quickly, and the action is not consistent in one direction for that many days in a row.  The S&P is back above the key 1370 level this morning, after breaking the key 1370 level yesterday.  And since it’s key that is leading to a lot of choppiness.  But bigger picture we continue to see a market under distribution, and what appears to be a ‘head and shoulders’ formation being created on the senior indexes.  If you are unfamiliar with the term, please google it.

Yesterday I mentioned we had two key points of support – that was last week’s lows of 1365 and the previous week’s lows of 1357.  Both came into play yesterday as the market ultimately bounced just above the latter level and finished just above the former level.   If 1357 were to break, the next key level is 1340.  But for now, as noted – the buyers keep pushing the market back above 1370 on each dip.  However each rally is on light volume, while each selling bout is on heavy – hence all the distribution days.

I’d also point out that we are having a sector rotation under the surface even as the major indexes are down less than 5%.   Just about the entire momentum growth stock universe is taking turns getting hit.  And some of it is very random – take Ulta Salon (ULTA) today.  I cannot find any news, so unless something pops up later today I have to assume some big boys are liquidating as volume is huge.  But this is exactly the type of action that can rip away a lot of your money as you search for ‘relative strength’ – pile in, waiting for a bounce day like today, only to be punched in the face.

Today we popped a bit in the broader market on some housing data but in the big picture that data remains quite weak… I think it was more of an excuse to simply get an oversold bounce going.  Yesterday’s gap (137.87) has not yet been filled but we saw the gap down post Good Friday took about a week and a half to be filled and then some chop, and then back down.   So no one should be surprised to see a run to fill this gap later today or tomorrow morning (with Apple’s blessing).  At this point with a long series of distribution days in the market we need to see a true change of character to feel like these moves up are anything but head fakes and frustrating moments for the bears.

Obviously key events are Apple earnings tonight and FOMC Meeting and Bernanke quarterly update Thursday.  But Europe has not gone away, even though the market some days act like it after their markets close.  I don’t think the path is much different than it has been repeatedly the past few years – things will downgrade, people will sit on their hands until it gets really bad, then people will panic as the situation worsens, and then Germany or the central bank will step in to kick the can.  Markets will surge on the kick the can for however long that can stays in the air.  We’ll rinse, wash, and repeat  - until we do it again.  It’s Groundhog Day as their system is broken due to lack of autonomy for each country or the ability to print their way out of messes ala UK, Japan, USA.  See Iceland for an example – they defaulted on much of their debt, devalued their currency like mad and are back to growth.  You never hear about them anymore since they had the independence to do such things.

Tags: Amp, Big Boys, Big Picture, Bounce, Bounces, Bouts, Choppiness, Day Like Today, Excuse, Google, Growth Stock, Head And Shoulders, Indexes, Light Volume, Lows, Momentum, Pullback, Rally, Relative Strength, Sector Rotation
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Global Stock Market Review: Europe Spoils the Party

Tuesday, January 17th, 2012

Investors last week faced a tug of war between signs of an improving U.S. economy and lingering concerns about Europe’s debt malaise. The Euroland worries moved to center stage on Friday when Standard & Poor’s downgraded the credit ratings of France, Austria, Italy, Spain, Portugal and four other European countries. Also denting sentiment were rumblings out of Greece, suggesting that the recently agreed bailout terms were now in doubt.

After starting off the year better than any other since 2006, the S&P 500 Index had its worst day of the year on Friday, but nevertheless remained in positive territory for the week as a whole.

Trading on stock markets during the second week of 2012 was again characterized by light volume, but it was nevertheless a good week for most risky assets such as stocks, corporate bonds, and precious and industrial metals.

Equities gained ground for the second consecutive week as shown by the performance of the two principal global equity benchmarks: the MSCI World Index closed 0.8% higher and the MSCI Emerging Markets Index surged by 2.8%. In a clear reversal of last year’s pattern, emerging markets have so far this year outperformed developed markets by a factor of 2.5.

Click on the table below for a larger image.

On the issue of mature versus emerging markets, well-known investor Marc Faber said: “What we had in 2008 was the outperformance of the U.S. and emerging economies’ stock markets and commodity markets got hit very hard, but it lead to a major low in emerging stock markets that bottomed out between October 2008 and March 2009. After that emerging stock markets outperformed the U.S. until the end of 2010. So I think we may get a similar picture. I read all the strategies that say we should invest in the U.S. I say maybe that’s correct for the next three months or so but I would rather be looking at an entry point in emerging markets over the next six to nine months.”

As far as the U.S. is concerned, all the benchmark indices ended the week in positive territory, with the S&P 500 and the Dow Jones Industrial Average gaining 0.9% and 0.5% respectively. But the real star was the Russell 2000 Index that improved by 1.9%. This is a good sign for the overall market as outperformance by small caps is normally associated with rising markets.

Al the U.S. indices are also higher for the year to date, ranging from +1.7% to +4.1% – in the case of the tech-heavy Nasdaq Composite Index.

When one considers the 10 economic sectors of the S&P 500 Index, it is clear that the cyclical sectors were the stronger ones over the past few days. These are sectors such as Materials (+3.9%), Financials (+3.1%) and Industrials (+2.6%). Not shown, Homebuilders (+7.5) surged on the back of Lennar reporting a solid increase in new orders. The lagging sectors were the defensive ones such as Utilities (-0.4%) and Consumer Staples (-0.3%). Energy also fared badly and was down by 1.4%. This pattern of cyclical sectors outperforming defensive sectors is what one would expect in the bull phase of a stock market.

Source: U.S. Global Investors – Investor Alert

Moving beyond the U.S., most stock markets ended the second week of the year in the black. Among mature markets, strong performers included Singapore (+2.8%), Australia (+2.2%), France (+1.9% – notwithstanding the country’s credit rating cut) and, surprisingly, Spain (+1.9%). In the emerging markets category China at long last rebounded, closing 3.7% higher. Also performing well were Hong Kong (+3.3%) and Brazil (+2.3%). The notable downmarkets included Portugal, New Zealand, Holland and the U.K.

Prior to last week’s improvement, the Shanghai Stock Exchange Index dropped by more than 30% from its high of August 2010. The trigger for the turnaround was Chinese bank loans and M2 money supply both rising more than expected as Chinese officials started taking action to stimulate the economy. Chinese equities look attractive from a valuation point of view and it would seem that investor concerns about slowing economic growth and a further shake-out in the property market have already been discounted by stock prices.

Tags: Bailout, Commodity Markets, Corporate Bonds, Day Of The Year, Emerging Economies, Emerging Stock Markets, Global Equity, Global Stock Market, Industrial Metals, Light Volume, Marc Faber, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, Outperformance, Risky Assets, Rumblings, Second Consecutive Week, Spain Portugal, Tug Of War
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Technical Talk: Trends still remain up on the S&P 500 as index hits 100-day moving average

Friday, August 6th, 2010

The comments below were provided by Kevin Lane of Fusion IQ.

The S&P 500 recently took out a resistance area (see chart below) near 1,115. The 100-day moving average (1,128) and the intraday highs near 1,131 stand in the way of a deeper breakout to the upside.

Near term the seasonal summer strength and the oversold rally continuation are the main trading themes. Many believe the ral­ly is predicated on a secondary stimulus package being tossed around Washington. Either way, the path of least resistance for now remains up and dips have been shallow. Investor sentiment remains dour (only 30% bulls in the recent AAII survey) and has helped stocks move higher as investor sentiment tends to be a great contrary indicator. The old saying is that the market exists to confound the majority and reward the minority, and certainly the majority lies in the skeptical camp.

That said, near-term momentum still remains up and until we get a dramatic shift towards negative internals traders are best re­warded with long strategies, albeit with reduced exposures and not full investment. The glaring negative is that the move up has been on light volume.

As seen above the S&P 500 has worked back above resistance in the last two sessions (red line) and remains in the context of a minor up-sloping channel (purple dotted lines). As long as the index stays above the lower channel line near 1,115 the bullish trend will remain in place.

Source: Kevin Lane, Fusion IQ, August 5, 2010.

Tags: Aaii, Breakout, Bullish Trend, Bulls, Continuation, Dips, Dotted Lines, Dramatic Shift, Exposures, Intraday Highs, Investor Sentiment, Iq, Light Volume, Ly, Momentum, Moving Average, Path Of Least Resistance, Red Line, Stimulus Package
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David Rosenberg: Government Bonds are on Fire

Friday, November 27th, 2009

In today’s Breakfast with Dave, Gluskin Sheff’s Rosie says:

Government bonds are on fire. Yesterday we saw a 10bps slide in the German Bund and U.K. Gilt yields – they are consolidating today – and U.S. 10-year yields are now down about half that amount, to 3.22% – 2bps from taking out the October lows, so keep an eye here for a possible technical breakdown in yields. The Canadian bond market already did that yesterday with the yield on the 10-year GoC slipping below the October lows – we have news for you: this was a major technical move. We can understand that government bonds are the “enemy” to the bulls (not once were Treasuries even mentioned as an asset class during my two-hour stint on CNBC the other day). But there is no denying that somebody is buying these bonds because the 7-year Treasury note auction ahead of Thanksgiving had $88 billion of bids for the $22 billion offering. Go figure, some folks clearly still have deflation on their mind (as they should).

We went into this latest round of turbulence with tremendous complacency in the marketplace (I really sensed it during the two-hour stint on CNBC’s squawk box on Tuesday) – rallies were still light-volume in nature (only two sessions in the past three weeks with NYSE volume north of a billion shares), the VIX index had just receded to its low for the year, at 20.5 (down 60% since March!), the bull share and bear share of the sentiment surveys hit late-2007 levels, and with the trailing P/E ratio at 27x and the forward P/E on $65 of earnings of 17x. There is no margin for error in an overvalued equity market – one that is priced for nearly 5% GDP growth. Remember, it was in the fourth quarter of 1987, a quarter that saw 7% GDP growth and a 55% earnings trend, that the S&P 500 cratered 30%. So, it’s not just about the economic backdrop, it’s what is being priced in – that is the lesson. For a highly overvalued market, it does not take much – like an off-the-cuff remark from the Treasury Secretary on the Meet the Press – to entice a massive round of profit-taking.

Don’t look now but the Baltic Dry Index has just slipped for the fifth session in a row, and down 12% from the November 19 interim high. Not a constructive near-term signpost for the commodity complex. However, as we said above, we look forward to a correction that allows us another opportunity to build long-term positions in this segment of the market where there are secular positive dynamics at play. But as we highlighted last week, anything connected to the U.S. dollar-carry-trade – a very overcrowded trade – is due for a correction.

To reiterate, the Swiss, the Russians, the Brazilians and the Vietnamese have all taken actions to weaken their currencies in recent weeks (see Russia Launches Campaign to Weaken Ruble on page C2 of the WSJ).

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Tags: asset class, Bear Share, Bond Market, Brazil, Canadian Bond, Canadian Market, Cnbc, Commodities, Complacency, David Rosenberg, Economic Backdrop, GDP Growth, German Bund, Gilt Yields, Gluskin Sheff, Government Bonds, Half That Amount, Light Volume, Lows, Nyse Volume, Russia, Squawk Box, Treasuries, Vix Index, Year Treasury Note
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David Rosenberg: These Belong in Ripley’s

Tuesday, November 10th, 2009

Ahead of a record week of new government supply in the U.S., the demand for the 3-year Treasury note at yesterday’s auction was unbelievable. It drew a 1.40% yield, which was 3bps through the auction bid deadline level. And indirect bidding also took up 68.6% of the auction, which in part reflects a very healthy foreign central bank appetite for Uncle Sam’s obligations.

At the same time, gold, the antithesis of U.S. government credit quality, shot up to yet a new record high. Then we have the equity market, which, despite ongoing contractions in credit and employment, is approaching its bear-market-rally highs (in fact, the Dow has already accomplished that). But the rub remains that these distribution sessions where the gains are exaggerated by light volume (barely over a billion shares on the Big Board? Are you kidding? After a 16.6% plunge on Friday, volume in yesterday’s session was still far below normal and the second lowest in the past two weeks). This is a sign that conviction over the current rally remains unusually light.

The U.S. dollar traded down to a 15-month low, which may help partly explain the continued run-up in gold, though bullion is in a bull run against most currencies; and the weak dollar is widely considered as the genesis for the ‘carry trade’ rally in risk assets, though many countries outside the U.S.A. also have their funding costs near zero. It would seem that investors are optimistic on the future insofar as governments and central banks around the globe are going to damn-the-torpedoes-and-go-full-steam ahead and act as the consumer of first and last resort for their economies. The fact that the U.S. government, at a time when the deficit/GDP ratio is already at record levels of 10%, feels compelled to:

- Extend jobless benefits for up to two years (why not just put these folks on the government payroll? At least the unemployment rate will start to go down).

• Expand the homeowner tax credit.

• Provide tax breaks to homebuilders (the ones who helped get us in to this mess).

• Provide businesses with tax credits for new hires.

• And bump up social security payments once again.

All this really attests to how rotten things are beneath the surface. No doubt that all the government stimulus is going to provide some impetus to corporate profits, but what exactly is the fair-value P/E multiple in a period of state capitalism is a legitimate question.

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Tags: Auction Bid, Bear Market, Bullion, Carry Trade, Central Banks, Contractions, Credit Quality, David Rosenberg, Gdp Ratio, Gold, Gold Bullion, Government Credit, Government Payroll, Government Supply, Jobless Benefits, Light Volume, Market Rally, Time Gold, Torpedoes, Unemployment Rate, Weak Dollar, Year Treasury Note
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