Bespoke Investment Group

Earnings Beat Rate Sticking at 62%

Another 682 US companies reported earnings this week, bringing the overall total reported this earnings season up to 1,903.  Next Thursday marks the end of the first quarter reporting period when Wal-Mart releases their numbers.  As shown below, 62% of the companies that have reported have beaten analyst earnings per share expectations.  With only a handful of companies left to report, the "beat rate" is sure to hold above 60%.  The fact that the "beat rate" has been able to increase as more and more companies have reported has helped the market trade higher throughout earnings season.  Last quarter's "beat rate" was a bear market low of just 55.5%.  As shown in the bottom chart below, this earnings season will be the first quarter over quarter increase since the third quarter of 2006.  When the "beat rate" started to decline in 2007, it was definitely a warning signal for the market, and this quarter's increase is hopefully the start of a new positive trend.

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Credit Default Swaps Show A Decrease In The Fear Trade

Credit Default Swaps (or default risk) have really come in over the last week, and as shown below, an index of CDS prices for 125 investment grade North American debt broke its uptrend and key support in recent days.  A break of these key technical levels leaves plenty of room to run on the downside, which is a positive for the overall market.

 

Below we highlight the CDS prices for four big banks and brokers.  Default risk for these companies has also dropped significantly over the last few weeks.  CDS prices for Morgan Stanley and Goldman Sachs have really moved back to more normal trading levels, while Bank of America and Citigroup are down but still have a lot further to fall before anyone can say the coast is clear.

 

Today's Stock Performance

Today was one of those rare days (at least based on the last two months) that the market declined.  While the index was down a little more than 1%, the average stock in the index was down more than 2%, which indicates that the largest stocks in the index held up better than the smallest stocks.  We also broke the index into deciles (50 stocks in ten groups) based on their performance from the start of the rally through yesterday's close to see how they performed today.  While the very best performing stocks during the rally actually held up okay today, the 2nd, 3rd, and 4th best deciles were down big today.  The two deciles of stocks that were up the least during the rally were also down the least today.

 

Negative Reversals During the Current Rally

Negative reversals are never fun for the bulls, but by themselves they aren't a signal that the rally has reached the end of its rope either.  As shown below, today's negative reversal is the fourth time since the March 9th low that the S&P 500 traded up more than 1% from the open and then reversed lower to trade down more than 1% from the prior day's close.  As shown, none of these periods marked the beginning of the end.  In fact, on two of the four days (3/13 and 3/25), the S&P 500 actually reversed again to finish the day in positive territory.

 

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Technology & Financial Sector Relative Strength

The chart below shows the relative strength of the Technology and Financial sectors versus the S&P 500.  In each chart, a rising line indicates that the sector is outperforming the S&P 500 while a declining line indicates underperformance.  We have also included dots showing each time the Fed cut rates (red) and left rates unchanged (black dots).

After a strong run of outperformance since late November, technology stocks have steadily outperformed the overall market.  In fact, on Monday the tech heavy Nasdaq became the first major index to trade above its 200-day moving average.  SInce then, however, tech stocks have faltered and on each of the last three days, the sector has underperformed the S&P 500 by a wide margin.

In terms of relative strength, Financials have yet to run into the problems that the tech sector has encountered.  However, while the sector has had what can only be classified as an extraordinary rally, it has a ways to go before it even tests its downtrend in relative strength that has been in place over the last year. 

 

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Oil Now Up 70% Since February

Don't look now, but oil has been moving sharply higher over the last couple of weeks, and it is now up 71.15% over the last 3 months.  A move of this magnitude in any other market would normally be getting front-page headlines, sparking fears that energy prices would "break the back of the consumer."  But since the consumer's back is already supposedly broken, nobody seems to care -- yet. 

But rest assured that a continued increase in prices at the pump will start to be felt at some point, causing another area of concern for both the people that consume it and the people in Washington hoping to decrease our use of it.  If oil prices are going higher on their own during such a tough economic time and Washington pols try to make them go up even more with cap and trade, taxes, etc., it's not going to make their constituents too happy.  At least we know that Russia, Venezuela, the Middle East, and OPEC are starting to breathe a sigh of relief.  Things weren't looking too good for them when oil was in the $30s.

 

What's The Best Performing Group Year to Date? Take A Guess

Which S&P 500 Industry Group is up the most so far year to date?  Retail?  Homebuilders?

Probably the last group anyone would think of is the right answer -- Autos!  As shown below, the S&P 500 Automobiles & Components group is currently up 54.19% year to date, making it the top performer of the 24 industry groups through today.  And this is even with one of its five members (GM) down 50% so far in 2009.  Ford (F) is the best performer in the group with a gain of 172.5%, followed by Goodyear Tire (128.5%), Harley-Davidson (26%), and Johnson Controls (10.3%).

 

S&P 500 Dividend Yield Drops 100 BPS

Since the March 9th low, the indicated dividend yield of the S&P 500 has dropped from 4.12% to 3.12%.  At the same time, the yield on the "risk-free" 10-Year Treasury Note has risen from a low of just over 2% to its current level of 3.15%.  The fact that the 10-Year yield is now higher than the dividend yield of the S&P 500 makes equities less attractive.

 

 

On March 9th, 23 stocks in the S&P 500 had indicated dividend yields of more than 10%.  Below we highlight these companies and provide their current indicated yields.  As shown, most of them have come in significantly.

 

High Yield Credit Spreads

As noted earlier with the VIX, high yield credit spreads are also down to their lowest levels in over six months.  Based on data from the Merrill Lynch High Yield Master Index, junk bonds are currently yielding 1,308 basis points above comparable treasuries.  These levels are by no means normal, but they are considerably better than the 2,100 basis point spread investors were dealing with in December.  Additionally, they are also indication that the doomsday scenario markets priced in following the Lehman bankruptcy are being erased.

 

VIX Hits Lowest Levels Since September

In another sign that a sense of normalcy is returning to the markets, the VIX index has declined from a high of 89.53 in October all the way down to 32.67 today.  While the index is still higher than it was prior to the Lehman bankruptcy (25), it has come a long way.

 

Year to Date Performance of Leveraged ETFs

In our last post we looked at non-leveraged ETFs, and below we highlight the best and worst performing leveraged ETFs so far in 2009.  Even though the market is trading close to flat year to date, only 27 of the 110 leveraged ETFs that we track are up for the year.  The double long technology ETF (ROM) is up the most at 36.37%, followed by the double long semiconductor ETF (USD), the double long QQQs (QLD), and the double short long-term Treasury ETF (TBT).  The second best performing double short ETF is the Japanese Yen (YCS).

 

The list of the worst performing leveraged ETFs this year shows just how crazy these products can be.  The two worst performing leveraged ETFs in 2009 are the three times financial short and long securities!  FAS (long) and FAZ (short) track the Russell 1,000 financial sector, which is down a little more than 2% this year.  Even though the sector is down, the 3x short ETF (FAZ) is down more than the long one.  And they're both down by huge amounts even though the sector itself is only down a couple hundred basis points.  FAZ is down 82%, and FAS is down 62%!  Wow.

 

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Most Overbought and Oversold Non-Leveraged ETFs

We recently searched all of the ETFs that we follow in our daily ETF Trends report and found the ones currently trading the furthest above and below their 50-day moving averages.  As shown below, many ETFs across all asset classes are trading well above their normal trading ranges.  The private equity ETF (highlighted yesterday) is the furthest above its 50-day at 36.86%.  The metals & mining ETF (XME) ranks second at +34.44%, followed by steel (SLX), financial preferreds (PGF), regional banks (RKH), and the homebuilders (XHB).  All of the ETFs listed above were hit the hardest during the downturn and they are recovering nicely, albeit off of very low bases.

 

Below we highlight the 16 ETFs out of the 200 or so that we track that are trading below their 50-day moving averages.  Natural Gas is the furthest below its 50-day, as it cements its status as the worst commodity on the planet these days.  The list is primarily made up of fixed income and commodity ETFs that have sold off as equities have rallied.

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A Private Equity Pick-Up?

PowerShares has an ETF (ticker: PSP) that tracks private equity companies that are publicly traded.  It's not news to anyone that private equity has been hit extremely hard throughout the financial crisis, and from its peak to trough over the last two years, PSP went down 87%.  Since March 9th, however, PSP is up exactly 100%.  It's also the ETF in our ETF Trends report that is currently the furthest above its 50-day moving average (DMA).  As shown in the 50-DMA spread chart in the second chart below, this is by far the most overbought the ETF has been in its short history.  While PSP has doubled in a matter of months, it still needs to gain 287% if it wants to get back to its all-time highs seen in June 2007.

 

 

Breadth By The 50-Day

As the market continues to rally, the percentage of companies now trading above their 50-day moving averages also continues to rise.  As shown below, 92% of the stocks in the S&P 500 are now trading above their 50-days.  This is by far the highest reading since mid-2006, and it is indicative of extremely strong market breadth.

 

Every sector except Health Care and Consumer Staples has a >50-DMA reading of more than 90%.  The Consumer Staples sector is at 88%, and Health Care is at 75%.  Telecom only has 9 stocks in the sector, and all of them are trading above their 50-days.  The Industrials sector ranks second at 98%, followed by Energy and Utilities at 97%.  While still high, Financials and Consumer Discretionary have actually seen a decline in the percentage of stocks above their 50-days over the last week.  The indicator maxes out at 100%, so there isn't currently much upside room from a breadth perspective.  A pullback in these extraordinary numbers would be neither surprising nor unhealthy.

 

 

 

 

 

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Christmas in May

While the calendar says May, the market is as quiet now as it typically is around Christmas.  As shown below, today's intraday range for the S&P 500 was 1.15%.  The last time we traded in this narrow of a daily range was the day before and the day after Christmas (12/24 and 12/26).  Before that you have to go back to August. 

 

S&P Price Action

One interesting price level to look at when coming off of market bottoms is whether or not a new bear market (20% decline) would take the index back to new lows.  Up until recently, a 20% decline would have meant a lower overall low, but if the market were to top out now, a new bear wouldn't mean the March lows would be violated.  This acts as an additional level of support.  As shown below, if a new bear market started following yesterday's high, the -20% threshold would only take the S&P 500 down to 725.79, which gives investors 50 points to work with before the index reaches the March low of 675.

 

Past Years Most Correlated With 2009

With the market dropping big in the first two months of the year and then rallying big over the last two months, investors are wondering where we go from here.  We have a cool file here at Bespoke that looks at the market's pattern in the current year and finds prior years with the most similar patterns.  The file looks at the correlation between the year-to-date returns of the Dow at any point in the current year with all historical years. 

Since 1900, there have been two years that have a correlation with this year (as of May 5th) of more than 0.75 (1 is perfectly correlated).  These two years are 1982 and 2000.  As shown in the chart below, the chart patterns through May 5th have been very similar for all three years, although the moves this year have been more extreme.  The current year is most correlated with 1982 at this point, and as shown below, the Dow actually topped out in May of that year and went on to make a new low, only to post huge gains in the last quarter of the year to finish up 20%.  If the rest of 2009 plays out anything like 1982, it will be painful at first but sweet in the end.  In 2000, we had a similar decline through early March, saw a big rally into the Spring, and then traded sideways for the rest of the year to finish down 6%.

 

Gold Breaks Short Term Downtrend

After nearly being written off for dead, gold has quietly rallied by 3% over the last two days, bringing it back above $900 per ounce.  In the process, the commodity has also broken its short-term downtrend that had been in place since it closed above $1,000 on February 20th.  Over the last eight weeks, gold has been weak as stocks have rallied.  With gold now showing strength, will equities pause?

 

Nasdaq Closes Above 200-Day Moving Average

Yesterday, the Nasdaq closed above its 200-day moving average (DMA) for the first time since August 15th, 2008.  That stretch of 178 trading days represents the seventh streak of 150 or more trading days where the Nasdaq closed below its 200-DMA.  In the table below, we highlight each of those periods along with the magnitude of the Nasdaq's rally from the low of the streak to the first close above its 200-DMA. 

 

From the low to yesterday's close, the Nasdaq has rallied 39%.  Compared to the prior six periods listed above, this is the strongest rally from a bear market low to the first close above the 200-DMA for the Nasdaq. 

 

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S&P 500 Up In 2009

After rallying 36.06% from the March lows and 3.39% today, the S&P 500 is now up 0.44% for the year.  Below we provide a chart of the S&P 500 year to date.  So far it's been a wild ride and we're not even halfway through.

While the S&P 500 is up for the year, only three of its ten sectors are in positive territory.  The Technology and Materials sectors are up the most at 19.4% and 18.5%, while Consumer Discretionary has been the third best at +11.3%.  Utilities, Health Care, and Consumer Staples -- all defensive sectors -- are down the most year to date.  It's nice to finally see the market in the green for the year, and hopefully it can last longer than one trading day.

 

Overbought Levels and Lengths

Investors are worried that the market is set to pull back now that we have reached overbought levels (1 standard deviation above the 50-DMA).  However, markets can stay overbought for long periods of time just as they stayed oversold for months at a time during the most recent bear.  The S&P 500 has now been overbought for ten days in a row.  Since the bear market started in October 2007, the only other streak of consecutive overbought days ended at 15 last May. 

 

When we look at streaks of overbought days going back to 1928, however, the current 10-day period is nothing but a blip on the screen.  As shown below, there have been thousands of similar or more extreme streaks of overbought days, so just because we're overbought now doesn't mean we can't stay overbought.

 

Best and Worst Performing Stocks on Earnings

ln our last post we highlighted the average change on earnings reports for stocks in each sector.  Below we highlight the 30 stocks that have gone up the most in response to their Q1 '09 earnings reports and the 30 stocks that have gone down the most.  For stocks that report earnings in the morning, we use that trading day's price change.  For stocks that report after the close, we use the next trading day's price change.

As shown, HGSI has had the best earnings report response with a one-day gain of 57.55%.  RT comes in a close second with a gain of 56.81%.  Other notables on the list of winners include WYN, BGFV, EXPE, TIN, and BBBY. 

SQNM has had the worst reaction to its earnings report with a decline of 75.72%.  E*Trade (ETFC) and Bank of America (BAC) also rank in the bottom six.

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Sector Reactions to Earnings Reports

We're now in the home stretch of earnings season, and below we highlight the average one-day price reaction to earnings reports for stocks in each sector since April 7th.  The average reaction to earnings for all US stocks that have reported has been a gain of 2.43% on the first trading day following the report.  Three sectors are outperforming the overall average -- Consumer Discretionary, Consumer Staples, and Technology.  The average stock in the Consumer Discretionary sector has gone up 5.24% on the first trading day following earnings.  Consumer Staples ranks second at 4.80%.  Again, the consumer sector continues lead this market.  Only stocks in one sector, Utilities, are averaging a decline in response to their earnings reports.

 

New York Times vs. Adam Smith

Anyone who has ever taken an economics course knows the basic rules of supply and demand.  When demand is high and supply is fixed, prices rise.  Likewise, when demand falls and supply remains unchanged, prices fall.  Given these basic rules of economics, one would assume that the newspaper industry would be cutting prices given the continued decline in their circulation rates.  Last week, the Audit Bureau of Circulations announced that newspaper circulation in the six months ending March 31st declined by 7%, which was an acceleration of the declines seen over the last two reporting periods.

Less than one week after these figures were released, however, The New York Times seems to think that the answer to weaker demand is higher prices.  This morning, the Financial Times is reporting that the Times will raise the price of its Monday - Saturday editions to $2.00 (from $1.50) and the price of its Sunday paper to $6 (from $5).  Higher Prices = Higher Demand?  Adam Smith must be rolling over in his grave.

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Bespoke's Commodity Snapshot

Below we provide the year to date change of ten major commodities.  As shown, copper is up the most in 2009 at 54.3%, followed by orange juice (21.81%), oil (18.61%), and platinum (17.71%).  While platinum is up 17.71%, gold is up just 0.84%.  Last year, platinum traded down to a 1 to 1 ratio with gold, even though the metal is much rarer than gold.  So far this year, however, platinum is diverging from gold on the upside once again.  Natural gas continues to be the big loser with a decline of 37.23% year to date.

 

Below we provide our trading range charts of the commodities highlighted above.  The green shading represents between 2 standard deviations above and below the commodity's 50-day moving average.  When the price moves outside of this green shading, the commodity is considered overbought or oversold.  Oil is pretty close to the top of its trading range, and the last time it moved above the green shading, it pulled back pretty quickly.  Natural gas is the closest to oversold territory and continues to trend downward.  Gold, silver, and platinum have broken their uptrends recently and are approaching the bottom of their trading ranges.  Copper, corn, wheat, orange juice, and coffee are closer to the top of their range than the bottom.