If the declines in the VIX have you thinking that volatility in equities is beginning to abate, think again. Earlier in the month, we highlighted how the frequency of all or nothing days in the market was at the highest levels since S&P reclassified its grouping system in 2001. By all or nothing, we mean days where each of the 24 industry groups in the index were either all up or all down. In the chart below, we revisit the frequency of all or nothing days using the 25-day rolling total. Over the last twenty-five trading days, there have been 12 days where either all the groups were up or all the groups were down. Keep your seat belts on.
We recently completed the second quarter update of our historical earnings database and have run some screens based on the data. Below we have filtered over 2,200 stocks to find the strongest and weakest earnings reports of the season. In the "strongest" report screen, we found stocks that beat earnings estimates, guided higher and closed up more than 7% on the first trading day following their reports. In the "weakest" report screen, we found stocks that missed earnings estimates, guided lower and closed down more than 10% on the first trading day following their reports. Some of the key names on the "strongest" list are BCSI, NVT, NILE, BIDU, UA, GRMN and CROX. Key names on the "weakest" list are VCLK, JNY, CFC and LAMR. A complete downloadable list of all second quarter earnings reports is available to www.bespokepremium.com subscribers.
A Bespoke Premium subscriber recently requested an update of a post we did prior to second quarter earnings season on the most volatile stocks on earnings reports. We specifically wanted to find the stocks from our Earnings Database that had the largest average absolute price change on the first trading day after an earnings release. Below we highlight the stocks that have had an average absolute 1-day percent change of greater than 10% in reaction to earnings. We limited our list to those that have had at least 3 years worth of reports and are trading above $10/share.
If you would like this information on a certain stock or basket of stocks, or if you would like to learn how to purchase the Bespoke Earnings Database, simply fill out this contact form or email email@example.com and be sure to mention "Earnings."
Over the last two weeks, Hong Kong's benchmark stock index, the Hang Seng, has put up returns that would make even China jealous. With a 23.7% gain since the Fed's cut in the Discount Rate, Hong Kong stocks are at their highs for the year. While the Fed cut in rates certainly acted as a boost to stocks worldwide, the real impetus behind the sharp rise in Hong Kong equities is the trial program by China that allows Chinese investors to buy stocks listed in Hong Kong.
The S&P 500 is set to open up more than 1% this morning as investors anticipate market friendly speeches by Fed Chairman Bernanke (10 am) and President Bush (11:10 am). Since the start of 2003, there have only been eight other occurrences where SPY opened up more than 1%, two of which were this month. On average, the market's returns intraday are negative (-0.11%) with declines in five out of eight days. Looking at the two occurrences this month, we found that the market declined from the open on both days for an average decline of 0.70%.
ln our weekly Bespoke Sector Snapshot, we provide charts of the various indicators we use for sector allocations in our money management accounts. One of the indicators we follow closely is the 10-day advance decline line. This takes the average daily number of advancers minus decliners in an index or sector over a 10-day period. Surprisingly, even though the S&P 500 remains closer to the bottom of its trading range, its 10-day is in overbought territory. We are also seeing overbought readings on many sectors as well (ones trading in the red zone below). We are looking for these A/D lines to move back into the green zone or at least into neutral territory before turning bullish in the short term. For a sample of our Sector Snapshot report, click here. If you would like to receive this report regularly, please subscribe at www.bespokepremium.com.
As the decline in the US dollar and the relative weakness of the US economy are expected to continue, interest in international stocks continues to increase. This has also attracted investors to US companies that generate a significant portion of their revenues outside the US. This enables investors to gain international exposure without the hassles associated with investing in international companies. We recently created the Bespoke International Revenues Index to track S&P 500 stocks that generate more than half of their revenues from outside of the US. Below we highlight the performance of this Index from March 2005 through July 2007. As shown, the Index has outperformed the S&P 500 and the S&P 500 Equal Weight indices handily over this time period.
We have also created the Bespoke International Revenues database (sample pdf) that contains the percentage of international revenues for each stock in the S&P 500 and Russell 1,000 for the last three years. This information is not readily available and must be obtained by analyzing each company's annual reports. We have collected all of this information, however, and organized it into one file for easy analysis. If you're looking for the stocks that make up the Bespoke International Revenues Index or would like to have the revenue data to analyze for yourself, you can purchase the database immediately. Simply email firstname.lastname@example.org or call 914-315-1248 for pricing and more information.
On Monday, we highlighted the market's historical performance in the week before and after Labor Day. Below we provide the historical performance of the Dow Jones Industrial Average on the day before Labor Day. Since 1901, the index has gone up on the Friday before Labor Day 71% of the time for an average gain of 0.48%. The performance has gotten worse since 1990, however, as the index has only gone up 47% of the time for an average gain of 0.13%. The table below highlights some long streaks of up days in the past. The market was up on the day before Labor Day every year from 1919 to 1930, 1932 to 1940, 1950 to 1959 and 1968 to 1980. From our prior post on the years most correlated with the current one, we found that the Dow was up on the day before Labor Day all five times ('57, '63, '68, '75, '83).
Last week, we posted on the 4-week change in third quarter earnings estimates for S&P 500 sectors. As shown below, most analyst estimates had not yet declined by much even though the credit crunch had clearly been affecting things since late July. Estimates for the earnings of Financials in the third quarter had only fallen by 1.35% over the past 4 weeks.
Now one week later, the estimates have begun to fall. Third quarter earnings estimates for Financials are now down 2.52% and 1.14% for the S&P 500 as a whole. Technology and Telecom, however, are two sectors whose estimates have risen. We expect estimates to continue to fall, but with each decline, the market will react less and less. We're baffled that the market reacts at all to downgrades in the Financial sector at this point. We saw much of Tuesday's declines attributed to Merrill's downgrade of some stocks in the sector. But anyone who did not see estimate cuts coming must have been asleep at the wheel.
Even though many think that recent credit problems will be contained to the Financial sector, it's important to note how important the sector is to the market as a whole. Based on the market cap of all stocks, the Financials accounts for 20% of the market. Even more significant, however, is the sector's contribution to overall earnings. Based on that metric, Financials account for nearly 30% of all earnings in the S&P 500.
We are just about finished with our new database of historical upgrades and downgrades for over 2,500 companies. This database analyzes price reactions to analyst recommendations based on a variety of factors. Among other things, it's able to tell how stocks typically react to upgrades or downgrades along with which brokerage firms have the biggest impact on upgrades or downgrades. So let's use the database for a key upgrade today.
Motorola (MOT) was upgraded from Equalweight to Overweight at Lehman Brothers this morning. We looked at prior upgrades for Motorola since 2002 to see how the stock typically trades on the day of an upgrade. We eliminated all upgrades that came on the day of an earnings report since the earnings are the reason for the price moves on those days. Our database has 30 total upgrades and 24 upgrades from Hold to Buy (as Lehman did today). On average, Motorola opens up 1.44% on the morning of an upgrade and then trades down -0.50% from open to close. So for Motorola, investors tend to fade the open after the stock gaps up on an upgrade. The stock is currently looking to open up about 2% this morning.
If you're an individual or institution that would like to purchase our unique Upgrades/Downgrades database, please call 914-315-1248 or email email@example.com.
At three days into the trading week, the Bespoke Market Poll is tracking Bearish for the first time in the poll's existence. Fifty-six percent of participants have marked Bearish as their current view on the S&P 500. So what's your current view on the S&P 500? Let us know by taking part in the poll below:
This afternoon's rally is being attributed in part to a letter from Fed Chairman Bernanke to Senator Chuck Schumer dated Monday, July 27th. For those interested in reading the entire letter they can click the following link (click here for letter). The excerpts which have gotten investors the most excited include:
"FOMC has stated that it is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."
"I share your concern about the potential impact of scheduled payment resets on homeowners with variable-rate subprime mortgages."
We would note, however, that while these comments are reassuring, the letter contains no real new news or policy, and is only a rehash of prior comments the Fed has made.
If lately you feel like you would be better off not even getting out of bed in the morning, you may be right. Examining the performance of the S&P 500 during market hours vs. after hours shows that over the last 50 trading days, the S&P 500 (as measured using SPY) has gapped up an average of 7 basis points, while the average intraday return has been a decline of 17 basis points. Just one more reason to hit the snooze button tomorrow morning.
Over the last several days, you may have noticed an unfamiliar term making its way into financial conversations, namely the TED Spread. The TED spread measures the difference between the three month US Treasury Bill and the three month Eurodollar Future. Elevated readings in the indicator indicate an increased level of risk aversion in the market, as investors flock to short term T-bills, which due to their credit quality and short time horizon, are considered risk free, while Eurodollar futures are more representative of the credit quality of corporate borrowers.
Below we show the history of the TED Spread dating back to 1986, along with how the market performed following similar spikes to the current one. As the results illustrate, the S&P 500's performance following extreme readings are mixed. In three out of four of the periods where the TED spread spiked, the market was higher three months later. However, the one time it had a negative return was in 1987 when the market crashed.
For Bespoke's market thoughts and stock recommendations, visit our home page at www.bespokepremium.com.
If there is anything positive to say about yesterday's sell off, it is that volume was downright anemic. Yesterday's S&P 500 volume was only 85% of average, indicating the possibility that the declines were exaggerated as many investors are on vacation. Financials were the worst performing sector and the only one where volume was actually greater than normal. Weakness in that sector was partly attributed to a downgrade of the brokerage group, even though it was hardly unexpected.
Yesterday's analysis of the Best Performing Stocks Year to Date was our 500th post since launching Bespoke back in May -- projecting us to break the 755 mark by early November. We just want to say a quick thank you to all of our readers and subscribers to Bespoke Premium. Hopefully our research is proving to be a profitable investment of your time!
The June 2007 S&P/Case-Shiller Home Price data was released today, and the composite index of the 20 cities/regions they cover was down 3.49% from a year earlier. The June data quantifies the recent downturn in housing, but the housing futures traded at the CME highlight what investors are expecting for home prices going forward. These futures point to continued declines through May 2008. The chart below shows the expected percent change in single family homes from June 2007 (the most recent Case-Shiller data) to May 2008 (the longest dated CME housing future). As shown, Las Vegas is expected to see the biggest declines at -5.6% while New York is expected to see the smallest at -2.6%. Currently, the composite contract expiring in May 2008 of the 10 cities below is trading 4.2% lower than the actual June 2007 number.
Below we provide charts of the historical year over year % change in home prices of the 20 cities and 2 composite indices that S&P/Case-Shiller tracks. The data is released monthly. Atlanta, Charlotte, Portland, Seattle and Dallas are the only cities that have yet to see negative year over year growth. Dallas, Boston and Denver are the only three with year over year growth higher than it was last month.
One of the approaches we use at Bespoke is to look for parallels between the present and the past. Often we will find that while history doesn't always repeat itself, comparable periods will have similar outcomes. With that in mind we looked to find years in the past which had the greatest correlation to the present. Below we highlight the five years since 1950 which have the greatest correlation to 2007, and in each chart we show the S&P 500's performance from 8/27 through the end of that year. Of the five years highlighted, the market finished the year higher from where it was on 8/27 four times for an average gain of 1.64%. However, we would caution that the one year of negative returns was a painful 10.4%.
Some may recall that we performed this exercise earlier in the Summer, when 1963 had the greatest correlation to 2007. Since then however, 1963 has become less correlated as the market has been slower to rebound this year from its Summer sell off than it did in 1963. Another interesting thing to note about the five years highlighted is that like 2007, three of them came in the third year of a Presidential term (1963, 1975, and 1983).
Last week we highlighted the current sector weights of the S&P 500. To expand on that post, we looked at their historical weightings on a yearly basis back to 1990 to see how the makeup of the index has changed. These weightings and their trends factor in our asset allocation process for our money management services. The area chart below highlights the historical weightings (%) of all ten sectors. Slow changes in these weightings offer a good long term picture of the changing economic landscape in the US. But fast changes in these weightings are a sign that things have gotten out of whack. It's easy to see technology's big pickup in 1999 and its subsequent drop. Financials have grown since 1990, but this year their weighting has declined some. Even still, the sector remains the largest in the index at 20%. Both the Consumer Staples and Consumer Discretionary sectors have seen their weightings decline over the years. In the early 90s, the Consumer Discretionary sector was the largest in the index. It currently ranks fifth. With the rise in oil prices over the past few years, the Energy sector has also seen its weight increase. But back in 1990, the sector made up an even larger percentage of the S&P than it does today.
Below we provide yearly S&P 500 weighting charts for each sector. The blue line represents the actual weight (%) and the red line represents the average over the period.
Merrill Lynch downgraded three brokerage stocks this morning from Buy to Neutral (BSC, C, and LEH), saying that "08 forecasts appear increasingly unrealistic for most." We can't imagine that this is a surprise for too many people, and we've been looking for these downgrades for some time now. Unfortunately, it's usually too little too late when these downgrades come. Below we highlight the performance of the three stocks since the analyst originally upgraded them to buys.