Even after a little back and forth action over the past couple of days, the S&P 500 has managed to hold its uptrend and remains above key support at the 1,400 level. The index is currently down 4.45% year to date.
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Since bottoming in March at $119.15, Apple (AAPL) has rallied 60% over the last 55 trading days to $190. This rally looks almost exactly like the gains Apple saw over a 58 trading day period from August 16th to November 6th, when it went up 64% from $117 to $192. On a closing basis, Apple peaked at $199.83 on December 28th, 2007. We put the stock in our Model Portfolio at $131 on March 19th and exited the position at $185 on May 6th. Apple definitely has some wind at its back these days, but as the stock approaches $200, it should be met with some selling pressure.
While the headline number for today's retail sales report was inline with expectations (-0.2%), the ex-autos number came in stronger than forecast (+0.5% vs +0.2%). In order to see where the strength and weakness came from, we broke out today's report by category to see which groups have seen the biggest increases and decreases in their share of the total retail sales pie. As shown, over the last year the categories that have seen the largest increase in their share of retail sales are Gas Stations, Food and Beverage Stores, and General Merchandise. These groups are all purveyors of non-discretionary items, indicating that rising inflation is causing consumers to spend a larger share of their disposable income on necessities.
Groups that have seen the largest decrease in their share of total retail sales include Motor Vehicle and Parts, Building Materials, and Furniture.
While retail sales rose 2% on a year/year basis, after adjusting for inflation, sales actually declined by 1.9%. In fact, this month's decline marks the fifth straight monthly year/year decline. This is the longest streak of monthly declines in the last fifteen years.
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Below we highlight a price and 1-month average volume chart for the S&P 500. Many market participants have been questioning the rally due to a lack of volume. While it is noteworthy that volume has declined, we'd note that volume is typically lighter when the market is going higher and heavier when it's going lower. Current volume levels seem much lower than normal because of the spike seen during the credit crisis from July '07 to March.
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As a follow-up to yesterday's post on Bloomberg's monthly survey of economists, below we highlight their consensus GDP, CPI and Fed Funds Rate estimates. In the first chart and table below, we highlight the median GDP growth forecasts from 65 economists surveyed. We also provide their median estimates monthly going back to the start of the year. As shown, estimates have ticked lower each month, with the exception of a 10 basis point increase in Q2 '08 GDP estimates this month.
Consensus CPI estimates for the second quarter remained the same this month at 3.7%. They ticked slightly higher for Q3 '08, lower for Q4 '08, and higher for Q1 '09. Economists also increased their expectations for the Fed Funds Rate by 25 bps for the next 3 quarters after a month of market stability and signs that inflation is now a bigger concern than it was.
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The unofficial earnings season comes to an end tomorrow with Wal-Mart's (WMT) earnings report. Below we provide a list of companies that have had the biggest one-day gains on their earnings report days this season. These companies all had one-day gains of 20% or more in response to their earnings reports. For companies that report in the morning, we use that day's change, while we use the following day's change for companies that report after the close. As shown, IAR was up the most on its report day this quarter with a 45% gain. IAR was followed by ENER, ALGT, ANAD, AMSC and YRCW. Google just barely missed the list with a gain of 19.99% following its earnings report.
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First it was highway guard rails, then manhole covers, and now gas tanks. While attending a family wedding in New Jersey this weekend, many of the out of town guests came out to their cars Sunday morning to find that the hotel's parking lot had been hit by gas siphoners. Apparently, like everything else from the Seventies has done at some point or another, siphoning gas is back in style. And if this is happening in New Jersey, where gas prices are among the lowest in the nation, you can bet it's a nationwide trend. Time to buy a gas cap lock.
We recently used Google's Trend analysis to compare the historical search volume of "oil" and "real estate" (click here to access the search). While "real estate" used to be searched much more than "oil", the spread has narrowed significantly in 2008. Searches for "oil" have pretty much remained steady over the years, but searches for "real estate" have nearly been cut in half since 2005.
The bottom chart analyzes news references of the two terms, and that one shows "oil" now significantly outnumbering "real estate." While the media has steadily increased it's use of "oil", the consumer doesn't seem to be increasing its search for it. Unlike real estate, where consumers were mostly happy to see the value of their homes go up, rising oil prices are not something that most people like.
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Bloomberg's monthly survey of economists was released on Friday, and the collective odds for a recession over the next 12 months dropped to 55% from 70% in April. Below we provide a chart of recession odds from the monthly Bloomberg economist survey versus the Intrade contract for a recession in 2008 going back to the start of the year.
The Intrade contract most recently traded at 27.3, which is down from a reading of 72.9 last month. It's noteworthy that the recession has to occur in 2008 for the Intrade contract, while it's over the next 12 months for the economist survey. But it still highlights that economists and traders have both become more skeptical of an actual recession, with traders more so than economists.
Energy prices have diverged from the rest of the commodity sector. As shown in our trading range charts below, both oil and natural gas are once again trading more than two standard deviations above their 50-day moving averages, which is extreme overbought territory. Gold and silver remain in short-term downtrends, while platinum surprisingly broke out of a sideways trading range last week. Corn is overbought, while wheat and coffee have settled down after huge runs a couple of months ago. And don't look now, but orange juice prices are finally starting to pick up. OJ recently broke out of one downtrend and is now closer to the top of its trading range than the bottom.
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Below we provide the titles and thumbnails of the in-depth B.I.G. Tips reports we released this week. If any spark your interest, they are all available to our Premium subscribers. These are anticipatory, ahead-of-the-curve research reports that cover markets, economies, stocks, commodities, housing and anything else related to making people money.
This week's B.I.G. Tips reports: Where's the Guidance (an ominous sign this earnings season), Oil and Oil Stock ETFs (technical analysis), EPS Revisions (a look at stocks and sectors with the biggest increases and decreases in earnings estimates this month), Oil Rally Now Bigger Than The Tech Bubble (an interesting comparison between oil and 2 prior bubbles), Dollar Turning (could it be true?), Hedge Fund Holdings (what is our proprietary hedge fund holdings index saying about the market?), Euro/Dollar Analysis (a technical take on two currencies), Decile Analysis (the strategies that are working and not working at the moment), Post Correction Rallies (is the current rally sustainable?), Monthly Dividend Screen (a look at ex dates for companies with strong dividends), Earnings Season Update (movers and shakers this earnings season).
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We heard countless times earlier this week that the ability for Fannie Mae (FNM) to go up on such poor earnings news on Tuesday (blue shading) was proof that the worst of the credit crisis was behind us. As shown in the chart below, the stock's performance on Wednesday, Thursday and Friday suggests that it was probably nothing more than short covering.
The Baltic Dry Index is up 82% since bottoming in late January, which might be a sign that the global economic environment is not faring as poorly as many think. The index was cut in half from its October peak to its January bottom, but it quickly reversed and is now approaching record highs again.
The Baltic Dry Index measures changes in the cost to transport raw materials by sea, and as noted on Investopedia, it "can give investors insight into global supply and demand trends."
"This change is often considered a leading indicator of future economic growth (if the index is rising) or contraction (index is falling) because the goods shipped are raw, pre-production material, which is typically an area with very low levels of speculation."
Below we have plotted the Baltic Dry Index along with a chart of the S&P 500 since the last bull market began in October of 2002.
After another 600+ US companies reported earnings this week, the earnings "beat rate" dropped slightly from 57% to 56%. Currently, 1,163 out of 2,076 companies that have reported since April 7th have announced better than expected earnings per share. As shown, the "beat rate" has fallen from the mid-60s over the last few quarters, but it's not yet at the low-50 levels seen during the last bear market.
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Don't look now, but oil is only up $1.60! We must have found a new oil reserve the size of China, or finally made peace in the Middle East. Did President Bush and Mahmoud Ahmadinejad just have high tea in Crawford? It's silly, but with oil up six days in a row and up $15 since the start of May, up $1.60 seems like welcome relief. There's still a half hour left of trading for the commodity, however, so $1.60 could easily turn into $3 or $4. Especially if it's announced that global demand has dropped 40% or something. Just like February in the Northeast when you ponder whether it will ever get warm again, who knows if oil will ever go down again.
Below we highlight prior times since 1986 that oil has been up six days in a row. It has now happened 37 times since then, and the commodity has actually gone up on day seven 52% of the time for a median return of 0.18%. Over the next week, oil has gone up 58% of the time for a median gain of 0.42%. The last time oil had a six-day winning streak was October 16th of last year. The commodity did, however, go down on the next day and over the next week following that streak.
Update: Oil only went up another $0.75 in the last half hour of trading to settle at $125.90 or so. It's a shame we have to wait a couple days for it to go up to $130.
As of the close yesterday, the Nasdaq 100 index was up 15.19% since the March 10th bottom. A look at the impact of the stocks that make up the index shows that the gains have largely been concentrated in just three stocks -- Apple, Google and Research in Motion. As shown below, AAPL has been responsible for 35% of the gains in the index, GOOG 9.87% and RIMM 8.50%. Collectively, these three names have accounted for more than half of the gains in the index during the post-correction rally.
Below we highlight a price chart of the CDX North American Investment Grade Index that tracks the credit default risk of 125 investment grade entities. After declining 50% from its peak closing price on March 10th, default risk has risen over the past few days, breaking the steep downtrend that formed over the past two months. Financials have been getting hit hard this week, and AIG's poor earnings report last night didn't help much. Hopefully this isn't the start of a new uptrend.
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In our Daily Morning Lineup available to Bespoke Premium members, we provide a list of the most overbought and oversold stocks that typically reverse when reaching these price levels. To do this, we look at the price action of stocks in the S&P 1500 over the last three years. Once we find the stocks that are the most overbought (oversold), we find the average performance over the next week and the percentage of the time the stock has been down (up) when it has been this overbought (oversold) in the past three years.
In the table below, we highlight the ten stocks in the S&P 1500 that are overbought and typically go lower, along with the ten stocks that are oversold and typically go higher. As shown, ACS, DOW, and ADBE are the four stocks that are overbought with the weakest performance over the next week when getting this extended in the past.
On the flip side, when KO has been this oversold in the past, it has gone up 85.7% of the time over the next week for an average return of 1.06%. WFR has averaged a return of 4.22% over the next week when it's this oversold.
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Long term government bond yields have been on the rise recently, although the degree has varied depending on the country. In the US, UK, and Japan, bond yields are at or near their highs of the year and have broken downtrends that have been in place since the onset of the credit crisis. Interest rates in the Euro region and Canada have also risen, but the downtrend in rates for both regions is still mostly intact. Finally, in Australia, where rates have been in a steady uptrend for the last two years, yields are currently testing the upper end of that range.
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Below we highlight our trading range charts for the S&P 500 and its ten sectors. The red shading and above it is overbought territory, while the green shading and below it is oversold territory. As shown, after breaking just above its longer-term downtrend, the S&P 500 has stalled at resistance even though it remains slightly overbought. The next level of support for the index is at the 1,380 level.
On a sector basis, most of them have moved back into neutral territory after trading overbought for a week or so. Short-term uptrends remain, but we'll need to see support hold soon if they are to stay intact. Energy, Materials, Telecom and Technology are still slightly overbought, with Energy and Materials at or close to their 52-week highs.
Google (GOOG) is trading higher this morning after its price target was raised by a sell-side firm from $570 to $700. Looking at prior calls by this analyst shows that while they have had a buy on the stock since March 2007, their price target changes haven't exactly been ahead of the curve. The chart below shows GOOG's price and price target from the analyst since March 2007. As shown, practically every bump up in the price target followed a rally in the stock, while every bump down in the price target was preceded by a fall in the stock.
So how has the stock acted following these changes in price target? GOOG's average percent change following the four price target increases was -7.8% over the next month with declines each time. One month after the analyst lowered their price target, the stock was lower two out of three times, but the one time the stock went up, it was up big (+23.1%).
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The Russell 1,000 was down 1.73% yesterday. We broke the index into deciles (10 deciles of 100 stocks) based on stock performance during the current rally to see which ones led the declines. As shown in the first chart below, the decile of stocks that were up the most from the 3/10 bottom through 5/6 were down the most yesterday, signaling that investors were simply taking profits in winners.
As in most rallies, stocks with high levels of short interest have been strong performers during the current rally. We also broke the index into deciles based on short interest as a percentage of float to see if highly shorted stocks led the declines yesterday. As shown, the decile of the most heavily shorted stocks was down the most yesterday, while the deciles with lower levels of short interest held up better.
Wal-Mart (WMT) announced stronger than expected sales this morning and also raised its revenue guidance for the first quarter. The stock has had a great run so far this year with a gain of just under 20%, and it is set to open higher on the news.
Since the low on March 17th, one of the key traits of the market's rally has been the ability of stocks to rally on bad news. As the chart below details, WMT has seen some profit taking over the last few days, so it will be interesting to see how the stock actually reacts to some good news. If today's news can't help the stock reverse its trend of the last few days, it will be an indication that investors are on hold for the short term.
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For the first time since April 11th, the S&P 500 closed down more than one percent. As shown in the chart below, this is the longest stretch since last Fall that the S&P 500 did not have a one-day decline of one percent or more.
So where do we go now? The S&P 500 recently broke through a downtrend line that had been in place since the index's all-time high in October. Past resistance usually acts as future support. If so, the current sell-off should be short-lived. If support is not held, expect sentiment to take a turn for the worse in the next few days.
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In early April, we pointed out the DCR/UCR trade to Bespoke readers, noting that if oil closed above $111 for three consecutive days, the two notes would hit termination at the end of the quarter at wherever their NAVs were trading. UCR is the "oil up" note and its NAV is calculated by dividing the price of oil by three. DCR is the "oil down" note and it is calculated by subtracting UCR's NAV from 40.
Once oil closed above $111 for three days in a row (seems so long ago), the termination triggered, so at the end of this quarter, the notes will be distributed to holders at their NAVs. But now that oil is trading above $120, DCR has no NAV [40-(120/3)=0]. Surprisingly, DCR's price is still trading at a premium to its NAV, and if oil is above $120 at the end of the quarter, owners will lose all of their money, effectively making it an option play on oil's decline at this point. UCR, on the other hand, will distribute $40 per share if oil is above $120, even though its price is trading at $37.26.
The image above is from MACROshares' website.
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