Bespoke Investment Group

Bespoke Premium Week in Review Newsletter

Each Friday, members of Bespoke Premium receive our Week in Review newsletter.  This report provides Bespoke's current market thoughts through commentary and the unique graphs and charts that Premium members have come to love.  Below is last Friday's Week in Review newsletter for Think B.I.G. readers interested in learning more about our Premium product.  Click the thumbnail to read the sample newsletter.  If you would like to subscribe and receive this week's report along with our many other unique products, please click here.

VIX Back Below 30

After settling nicely below the 30 level for about a week, the S&P 500 Volatility Index (VIX) jumped back above 30 earlier this week.  Today, however, the VIX has dropped significantly below 30 once again down to 28.36.  Earlier in the day it was down even more, but even as the market has moved back to flat, the VIX is still down quite a bit.  As long as the VIX continues its downtrend, fears in the market are subsiding.

 

Bespoke's Commodity Snapshot

Even after a pullback in portions of the commodity sector over the last couple of weeks, most are still up year to date.  As shown below, copper is up the most with a gain of 63.58%, and oil is not far behind at +60.85%.  Platinum, silver, orange juice, coffee, and gold are the other commodities that are up year to date.  Corn is down 5.76%, wheat is down 11%, and natural gas is still down the most at -26.98%.

 

Below we provide trading range charts of the ten commodities listed above.  The green shading represents between two standard deviations above and below the 50-day moving average.  As shown, oil remains at the very top end of its range, while natural gas has recently moved to its top as well.  Gold, silver, platinum, and copper have pulled back into neutral territory in recent weeks, while corn, wheat, orange juice, and coffee have seen significant declines.

 

 

 

 

 

Bespoke's Sector Snapshot

Below are our trading range charts for the S&P 500 and its ten sectors.  The blue shading represents one standard deviation above and below the 50-day moving average.  Moves into or above the red zone are considered overbought, while moves into the green zone are considered oversold.  The S&P 500 has moved back into neutral territory after trading overbought for a few weeks.  However, the index successfully held its 200-day moving average yesterday and its uptrend remains.  Investors looking to get back in the market on a pullback now have their chance.

Financials, Energy, Industrials, Consumer Discretionary, and Materials have also pulled back into their normal trading ranges.  Technology, Health Care, Utilities, and Consumer Staples remain overbought after outperforming over the past few days.

To receive these charts on a weekly basis, sign up for Bespoke Premium and access our Sector Snapshot report.

 

 

 

 

 

 

S&P 500 Group Correlation

If there is one thing we’ve learned over the last few years, it is that markets do not always act as planned.  For years, when the price of oil rose, stocks declined and vice versa.  Today, it seems that the two are connected at the hip.  A strong currency has often been considered a sign of economic strength, meaning that a strong dollar should be good for stocks.  However, last Fall when the economy was falling off a cliff, the dollar was trading at its highs for the year.  This year, the US Dollar index peaked within two days of the low in the S&P 500.

Given the constant evolving state of relationships in the capital markets, we have developed a new report for Bespoke Premium subscribers.  In it, we provide the six month correlations between each of the 24 S&P 500 industry groups and various asset classes (oil, Treasuries, and the US Dollar Index).  For each group, we list its correlation as well as the stocks within each group that have the most positive and negative correlation to the specific asset class.  So if you think that oil is headed lower, which groups and stocks should you avoid?  Or if you think the dollar will reverse its weakness and rally, which groups and stocks should investors focus on?  This new report will provide a blueprint for how these assets have recently been related.

Given that the ever changing relationship between various asset classes, we would stress that correlations will change over time, and our weekly tool for Bespoke Premium clients will help to highlight those changes as they occur. 

To receive regular access to our S&P 500 Group Correlation report, sign up for Bespoke Premium today using our monthly or annual subscription options.

Please click below to view a sample of the report.

Option Expiration Week Similarities Continue

In a post yesterday, we highlighted how this month's expiration week was starting off much in the same way that May's options expiration week progressed.  Heading into Friday, we see that the similarities over the last two trading days have continued.  In both months, the S&P 500 started off both options expiration weeks with three down days and then rallied 1% on Thursday.  Both weeks also traded within a 40 point range as well.  Unfortunately for the bulls, however, in May the week ended with another decline of 1% on Friday.

 

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Recent Sector Performance

The market has suffered a slight pullback this week, and below we highlight the performance of the S&P 500's ten sectors since last Friday.  This gives investors a quick look at where relative strength and weakness has been.  As shown, Health Care is the only sector that is up this week with a gain of 1.93%.  Along with Health Care, Technology, Telecom, Consumer Staples, and Utilities have outperformed the market.  Materials, Energy, and Industrials are all down about 5.3%, while Financials are down 4.66% and Consumer Discretionary is down 3.22%.  Since the March 9th lows, however, Financials are still up double the amount of the next closest sector with a gain of 90.68%.

 

 

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Government-Run Health Care -- Will It Fly?

Whether you're hoping desperately for it or praying that it doesn't pass, government-run health care is a major issue of the day.  Fortunately Intrade.com has a contract that allows people to bet on whether or not some new form of government-run health insurance will be approved by the end of 2009.  This gives investors, politicians, the media, and all US citizens the odds that people are putting on its passage.  The contract just opened for trading yesterday, and it has actually done quite a bit of volume already at 501 contracts traded.  It started at 50, but has fallen down to 42, which means traders are currently giving it a 42% chance of passing by the end of 2009.

 

The Dollar and US Stocks

If it seems like the S&P 500 and the Dollar move in the opposite direction of each other on a daily basis, it's because they pretty much do.  In fact, since daily pricing of the US Dollar begins in 1970, the six month correlation between the daily change of the two is at its most negative level ever.  The next most negative level of correlation between US stocks and the dollar came in 1982.  We can only hope, however, that our stocks and currency can perform like they did in the years following 1982.

 

Potash (POT) Down $20+ In A Few Days

For investors that haven't realized how much some of these commodity stocks have fallen in recent days, take a look at the chart of Potash (POT).  After rallying from $80 up to $120 in a couple of months, the stock has fallen more than $20 in just a few days.  Will the knife keep falling or will these commodity stocks find support soon?

 

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Financials Testing 50-Day

After trying unsuccessfully to break above its 200-Day Moving Average (DMA) several times last week, the S&P 500 Financial sector has been showing considerable weakness in recent days.  Today alone, the sector is down over 3% for its largest decline so far this month.  With these declines, the sector is now sitting right on its 50-DMA, which is a level that should provide at least some short-term support.  As noted in our prior post, the S&P 500's decline remains within the normal range of pullbacks we have had since the March lows.  If investors are looking for a catalyst for the market to rally from here, the current setup for Financials could provide the needed spark.

 

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Sixth Pullback Since The March 9th Low

After the declines of the last three days, the S&P 500 has entered its sixth pullback of at least 3% since the March 9th lows.  Below we highlight each of the six pullbacks within the overall uptrend.  As shown, the biggest decline came in late March when the S&P 500 fell 5.44% over a few days.  The last one came from May 8th through May 15th with a decline of 4.99%.  We're currently down 4.37% since the recent peak in the index, so we still have another percent or so to go before this one becomes the biggest correction of the new bull market.  With many investors already believing that the gains are finished for good, this chart puts things into perspective.  The last couple of days have been negative, but they've probably felt more negative since we've had it so good lately.  However, as of now, it's still nothing but a normal pullback within an uptrend.

 

 

Another Month, Another Lousy Expiration Week For The Bulls

While we've only had two full days of trading, options expiration week is shaping up to be a lousy one.  If it feels familiar, that's because it is.  As shown in the chart below, last month's expiration week (May 11 - May 15) was almost as bad as this month's has been.  While the S&P 500 is down 3.6% so far this week, last month it was down 2.2% in the first two days of trading and finished the week down 5%.  As Yogi Berra would say, the bulls are hoping it's not deja vu all over again.

 

 

S&P 500 Down More Than 1% Two Days in a Row

The S&P 500 has now declined by more than 1% for two days in a row, and while volume on both days has been considerably below the 50-day moving average, it was higher relative to the prior day.  On a technical basis, therefore, both days would be classified as distribution days, which is a negative signal.  Additionally, this is the first occurrence of consecutive distribution days since the market bottomed in March.  (In the volume chart below, green bars indicate up days while red bars indicate down days.)

 

Since the S&P 500 peaked in October 2007, the last two days represents the 26th occurrence where the S&P 500 has been down by more than 1% two days in a row.  As shown below, the average return on the third day has been a gain of 0.68% with positive returns only 48% of the time.  Since the market low in March, this is the third occurrence where the market has been down more than 1% two days in a row.  Following both of the prior occurrences, the S&P 500 was up more than 1% on the third day.

 

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Financial Sector Back To 2nd Largest

After falling all the way to fifth in the sector weight rankings for the S&P 500, Financials have moved back up to the number two slot.  As shown below, Technology is easily the biggest sector of the market right now, with a weight of 18.4% in the S&P 500.  The Financial sector has moved back up to 13.5% after getting down to 11% or so at its lows.  Health Care ranks 3rd, followed by Energy, Consumer Staples, and Industrials.  Consumer Discretionary, which was the biggest sector of the market back in 1993, now only represents 8.9% of the S&P 500.

 

Below we highlight historical S&P 500 weighting charts for each of the ten sectors.  The red line represents its average weight over the last 20 years.  As shown, the Financial sector has popped back up close to its long-term average, while Health Care and Consumer Staples have fallen off significantly after getting "overbought" in late 2008.  Industrials, Consumer Discretionary, Telecom, and Materials appear to be on the upswing.

 

 

 

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Second Lowest PPI Reading on Record

This morning's 5% decline in the year/year (y/y) Producer Price Index (PPI) was the second lowest reading in the history of the indicator (going back to 1948).  Tomorrow, we will get a read on consumer prices with the release of the CPI.  Heading into the report, economists are expecting the y/y reading to show a decline of 0.9%.  If the report comes in inline with forecasts, it will be the tenth lowest reading in the history of that index (going back to 1940). 

Given the fact that indicators of consumer and producer prices are near record lows and indicative of deflation over the last year, it is hard to imagine that most investors are worried about inflation down the road.  There is no denying that commodity prices, such as oil, have risen in the last few months, but rather than being a sign of inflation, is the rally in commodities more indicative of a market returning to some degree of normalcy? 

For example, from the bankruptcy of Lehman through the month of February, there was a widespread and growing view that the economy was on the verge of a second great depression.  As that view failed to materialize and the environment stabilized, equity and credit markets have rallied towards levels they were at prior to the Lehman collapse.  Rather than anticipating an economic boom, however, the rally has been the result of investors taking the depression trade off the table and pricing in a more 'normal' recessionary environment.  Along the same lines, even after the impressive rally in commodities, both oil and the CRB Index are still well below levels they were at prior to the Lehman bankruptcy.

 

 

Market Breadth Pulls In

The percentage of stocks in the S&P 500 above their 50-day moving averages fell to its lowest level in two months after yesterday's decline.  As of this morning, 71% of the stocks in the index were trading above their 50-days.  Health care, both consumer sectors, and telecom have seen the biggest decline in breadth, while the utilities sector has increased recently up to 91%.  This increase in utilities breadth indicates that investors are rotating money into the most defensive sector as the market takes somewhat of a breather.

 

 

 

 

 

 

 

Growth Outperforming Value

The S&P 500 Growth index is currently up 7.01% year to date, while the S&P 500 Value index is down 3.21%.  This growth outperformance is following a pattern that has been in place for some time now.  The bottom chart highlights the ratio of the S&P 500 Value index to the S&P 500 Growth index.  When the line is declining, Growth is outperforming Value.  As shown, since October 2007 (when the last bear market began), the ratio has been in a steady downtrend.  Will Growth continue to do better than Value, or is Value due for a period of outperformance? 

 

 

Light Volume Selloff

It's hard to find anything positive to say about a 2.5% selloff in the S&P 500, but at least volume has been light.  As of 1:30 PM ET, volume in S&P 500 stocks stood at 2.115 bln shares.  Since the market low on March 9th, the only two days with lighter volume as of 1:30 PM were last week (6/8 & 6/9).  On June 8th, the S&P 500 was down 1.1% as of 1:30 and finished the day down only 0.1%.  On June 9th, the S&P 500 was up 0.3% at 1:30 and finished the day up 0.4%.

 

 

S&P 500 Testing The Bottom Of Its Range

Another day, another test of the range.  For the eighth time in eleven trading days, the S&P 500 is testing one of the boundaries of its June trading range between 925 and 950.  While today's weakness is taking the S&P 500 below the low end of that range, we would note that since the start of June the index also had two 'false alarm' intraday breaks above 950.  If the S&P 500 closes below 925, however, it would be a blow for the bulls.

 

 

Barron's Roundtable Head Scratcher

This weekend's Barron's provided a mid-year update to its annual "Roundtable" report, and as the title of the article suggested, the consensus among panelists was that the market has come "too far, too fast."  While that view is certainly not a minority opinion, we are confused with the logic behind it.  As noted in the article,

"Many predicted at our Jan. 5 confab that the stock market, oversold and under-loved, was due for a major bounce. Now they think stock prices have overshot corporate fundamentals and a correction is in order."

So on January 5th, when the S&P 500 was at 927, the members of the Barron's Roundtable were looking for a major bounce.  Now, with the S&P 500 up 2% since then, they think the market has come too far, too fast?