Bespoke Investment Group

Performance During the Pullback

We recently broke the S&P 500 into deciles (10 groups of 50 stocks) based on stock performance during the last rally (3/9-6/12) to see what impact it has had on performance during the pullback.  The market is down more than 7% since June 12th, but the 50 stocks that were up the most during the last rally are down an average of 15.1%.  The 50 stocks that were up the least during the rally are only down 2.1%.  Investors have clearly been selling or shorting the big winners and moving into more defensive sectors.

 

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Investment Grade Corporate Bonds Holding Up Well

Even though equity markets have pulled back since the June 12th top, investment grade corporate bonds have continued to perform well.  Below is a year-to-date price chart of LQD, which is an ETF that tracks the investment grade corporate bond market.  Since bottoming in early March, the ETF has been in a very strong uptrend, bouncing off of the bottom and top of an upward sloping channel as it has worked its way higher.  While the S&P 500 is off more than 7% from its recent high, LQD is on the verge of breaking out to a six-month high.

 

62% Is The Magic Number

If the market is going to be able to trade higher this earnings season, the percentage of companies beating earnings estimates needs to be equal to or higher than the 62% reading we saw last quarter.  The market did well during the last earnings season because the earnings beat rate finally saw a quarter over quarter increase.  Prior to the 62% reading, the number had gone down every quarter since the second quarter of 2007 when the bear market started.  It's going to be hard to top 62% because analysts have been raising earnings estimates instead of cutting them this quarter. 

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Arm Yourself For Earnings Season

Now that earnings season has started, the quarterly numbers and subsequent price reaction for stocks will be making news over the next few weeks.  There's no way better to prepare yourself for earnings season than with the Bespoke Interactive Earnings Report database.

This database provides detailed earnings analysis for nearly 3,000 stocks.  We take the analysis to the next level by not only highlighting how the actual reports compare to analyst estimates, but also how the stock price reacts to the report.  Users of this database can easily find how a stock or basket of stocks typically reacts to earnings in order to prepare themselves for future quarterly releases.  Traders can also see how stocks trade after gapping up or down on earnings to develop trade ideas.  If IBM opens down $2 on earnings, what does the stock typically do next?  This database can answer that question and much more for the majority of US stocks that trade today!

Please click the link below to view a sample of the database. The sample database allows you to pull up earnings information for four stocks -- AA, GLW, MMM, and QCOM.  Simply enter each of these tickers in the small green box and press enter on the keyboard.  All of the company's historical quarterly reports going back to 2001 will then populate.  Remember, the full database contains this info for nearly 3,000 stocks!  If you own stocks, you should undoubtedly have this information at your fingertips when the companies report in the coming weeks. 

Download Bespoke Sample Earnings Database.xls

The Interactive Earnings Database is only available to Premium Plus members.  With Premium Plus, you'll get everything included in the regular Premium service, full use of all of our Interactive Databases, and much more access to the Bespoke research team.  Click here or call 914-315-1248 to become a Premium Plus member and begin using our unique earnings database today!

AAII Bearish Sentiment At Highest Level Since March

The first meaningful pullback since the March lows has brought the bears out of the woods.  According to the weekly poll from the American Association of Individual Investors (AAII), bearish sentiment is currently at 54.65%, which is higher than any other point since March 5th.

 

Just 24% of S&P 500 Stocks Are Above Their 50-Day Moving Averages

After resting above 75% for most of the past three months, the percentage of stocks above their 50-day moving averages in the S&P 500 has tanked to just 24%.  There are currently zero stocks in the Energy and Telecom sectors that are trading above their 50-days.  Industrials are the third worst at 3%, followed by Financials at 6% and Materials at 7%.  Utilities, Consumer Staples, and Health Care are all above 60%, so there has been quite a bit of rotation during this market pullback.  The last time the overall numbers were this weak, all sectors were down in the dumps.

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Oversold Market Reaching Extremes

The graphic below is from our Daily Morning Lineup, and it shows the current levels as well as the one week change in the trading ranges of the S&P 500 and its ten sectors. The circles represent where the sectors and index currently stand, while the tail represents where it was one week ago. When the circle is in the red zone, the sector or index is overbought (light red=overbought, dark red-extreme overbought). Readings in the green zone indicate that the index or sector is oversold (light green=oversold, dark green = extreme oversold).  For this analysis, overbought and oversold measures are defined as one standard deviation above or below the index's 50-day moving average.

Following the recent declines, the S&P 500 has now moved into oversold territory for the first time since March 11th.  On a sector basis, only two (Health Care and Consumer Staples) are currently above their 50-DMAs, while eight are below.  Of the eight trading below their 50-days, six are currently oversold, and four of those (Cons. Discretionary, Energy, Industrials, and Materials) have reached "extreme" oversold levels (two standard deviations below 50-DMA).  Like the overall market, it has been awhile since this many sectors were "extremely" oversold.  You have to go all the way back to the March 9th low to find a day when more sectors were oversold.  If you're bearish, this is the break you've been looking for, while if you've been waiting for a correction to get in, now is your chance.

 

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S&P 500 Holds 200-Day Moving Average Intraday

For the second time in two days, the S&P 500 has tested and bounced off of its 200-day moving average.  Given the fact that support tends to get weaker the more often it's tested (just like resistance gets weaker with each attempt to break through it), the bulls need a longer rally than the one we had yesterday if they have any hope of the index holding above current levels.

 

Volume in the Doldrums

While things typically quiet down during the summer, the pace of volume this year has been downright anemic.  Using the S&P 500 tracking ETF (SPY) as a proxy, the 50-day average dollar value of volume in the ETF has declined by 54% since its peak last Fall.  It is also currently at its lowest level since the S&P 500 peaked in October 2007.  While part of this is attributable to the decline in prices, the dollar value now is lower than it was in early March, even though prices are 30% higher.

 

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Who Needs Stocks When You Have a Mattress

Nearly 13 years after making 'irrational exuberance' one of the most familiar phrases of all time, stock market investors are anything but exuberant.  On 12/5/96, when Greenspan suggested that stock market investors may be out of touch with reality, the S&P 500 was at 744.38.  As of the end of the second quarter, the S&P 500 has gained 53.4% on a total return basis.  At face value, this seems like a respectable return on one's investment.  However, compared to alternatives the gain loses its luster quickly. 

Consider the three month US T-Bill, which is one of the safest, most conservative, and lowest yielding investments out there.  Back when Alan Greenspan was talking about 'irrational exuberance,' putting your money in three-month T-Bills was akin to stuffing it in the mattress.  Currently, three month T-Bills are yielding 0.1575%, which means you will receive 15.75 cents of interest for every $100 you invest.  Even with their low relative yields, however, T-Bills have had a total return of 56.4% since Greenspan's memorable quote, outperforming stocks by 300 basis points.  Equity market investors can only hope now that the years ahead look similar to what happened the last time stocks were underperforming T-Bills back in late 2002.

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Which Way Market?

Friday's big down day put the S&P 500 back into negative territory for the year.  As shown in the first chart below, we've been in negative territory for the year much more than we've been in positive territory.  The S&P has been flirting with both its 50-day and 200-day moving averages and its 2009 starting level for much of the past month.  All of this sideways buildup means that the eventual break in either direction will most likely be an extreme move.

 

Unfortunately, market technicians are focusing on the head and shoulders formation that could spell trouble if the 880 support level on the S&P breaks.  Art Cashin of UBS mentioned it this morning on CNBC, and below we provide a chart showing the head and shoulders pattern.  The textbook suggests that a break below the support level shown in the chart spells doom for the market going forward.  Hopefully we don't have to even test the pattern.

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Percentage of Stocks Above 50-Day Moving Averages

Another down day in the market has sent the percentage of stocks above their 50-day moving averages in the S&P 500 back below 50%.  Currently, 45% of stocks are above their 50-days.  The worst sector by far is Energy.  Just 8% of Energy stocks are above their 50-days, even as oil has been strong for the past few months.  Industrials is the second worst at 22%, followed by Consumer Discretionary, Telecom, and Materials.  Technology, Consumer Staples, Health Care, and Utilities are the four sectors that still have a reading above 50%.

 

 

 

 

 

 

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Mixed Bag

Yesterday we asked Bespoke readers where they thought the Dow would close at the end of 2009.  As shown below, the results are scattered all over the place.  There are slightly more bears than bulls, however, with 48% expecting the Dow to close higher than 8,500 and 52% expecting it to close lower.  The response that got the most votes was >9,000, while <7,000 got the lowest vote total.  Surprisingly, 12% of respondents think the Dow will close below 6,500 by the end of the year, which would be a decline of more than 24% from here.  That got the fourth highest vote total.  Only 29 respondents think the index will close higher than 10,500.  With the Dow down 150 heading into the July 4th holiday weekend, the bears are off to a good start.

 

Where Will The Market Go Next?

As we highlighted yesterday, the market has taken investors on a wild ride so far in 2009.  But where will it head next?  Please take part in our poll below that asks where the Dow will most likely close on 12/31/2009.  The index is currently trading at 8,550.  We'll report back with the results in a few days.  Thanks for your participation!

Where will the Dow close on 12/31/2009?
	>8,500
	>9,000 (+5%)
	>9,500 (+11%)
	>10,000 (+17%)
	>10,500 (+23%)
	<8,500
	<8,000 (-6.5%)
	<7,500 (-12.3%)
	<7,000 (-18%)
	<6,500 (-24%)
Free polls from Pollhost.com

A Wild Ride So Far

lf you went to sleep at the end of 2008 and just woke up today, you'd see the S&P 500 up 1.78% for the year and probably assume it's been a pretty boring six months in the market.  Oh how you'd be wrong, however.  As shown below, the market has taken investors for a wild ride so far this year.  On March 9th, the index closed the day down 25% for the year.  From March 9th through today's close, the index has rallied 36%.  Down 25% and then up 36% turns into up 1.78% at the midway point.

  

And while the S&P 500 is up as a whole, only three of the index's ten major sectors are positive in 2009.  Technology has been the big winner so far with a gain of 24.08%.  Materials is up the second most at 12.28%, and Consumer Discretionary ranks third at 7.52%.  And even though sectors like Industrials and Financials have been going up for months now, both are still down for the year.  The Industrials sector is down the most at -7.68%, while Financials are down 4.76%. 

While the year started off horribly for the market, it is heading into July in a nice uptrend even though it has been floundering for a few weeks now.  While some investors are getting frustrated with the market's inability to break to new highs, they easily forget how bad things were just a few months ago.  Up 1.78% in '09 with everything that has happened -- we'll take it!

 

Would You Buy This Stock?

Would you buy a stock whose chart looks like the one below?  It had a nice run but has pulled back quite a bit over the last couple of years.

 

The chart above is of the S&P/Case-Shiller 10-City Composite Median Home Price index.  MacroShares has been working on developing an ETF that tracks this index for what seems like years now, and today they finally start trading.  And yes, leverage is involved.  UMM tracks 3 times the 10-City Median Home Price index, while DMM tracks 3 times the inverse of the index.  Whether you want to use these as a hedge for your own home or speculate on the direction of housing, these ETFs now allow you to do it.  But if we get another big housing boom, the leverage on these things could take you on a wild ride.  MacroShares already had one of their inverse oil ETFs go to zero when oil shot up in 2008.  Whatever happens, these new ETFs will be interesting to track.

Q2 EPS Growth Expectations Are Ugly, But Getting Less Ugly

The second quarter reporting period begins next week with Alcoa's (AA) earnings release, and below we highlight the Q2 consensus earnings growth expectation for the S&P 500.  As shown, analysts currently expect S&P 500 earnings to decline 33.5% versus Q2 2008.  While this is an ugly number, it's a little less ugly than it was in May and early June.  Sign up for Bespoke Premium to get in-depth earnings analysis for indices, sectors, and stocks on a regular basis.

 

Nasdaq Outperforms the Dow

lf the month were to end today, the Nasdaq would be up 16.9% year to date, while the Dow would be down 3.05%.  Since 1972 (when the Nasdaq was started), this would be the second biggest outperformance for the Nasdaq versus the Dow in the first half of the year.  Below we highlight the difference in performance between the two indices in the first half of the year for every year since the Nasdaq has been around.  Only 1983 saw a bigger outperformance for the Nasdaq when it rose 37.13% versus the Dow's gain of 16.76%.  In that year, the Dow went up 3% in the second half, while the Nasdaq went down 12.58%, so there was a complete performance reversal.  In 1991, the Nasdaq was up 27.31%, while the Dow was up 10.37% (16.94% spread).  In the second half of that year, both indices continued higher, with the Nasdaq continuing to outperform.  1978 might be the most comparable to 2009 since the Dow was down slightly in the first half and the Nasdaq was up 14.52%.  In that year, both indices went down slightly in the second half. 

At least the Nasdaq isn't significantly underperforming the Dow heading into the second half.  In the four biggest years of underperformance (2001, 1973, 1974, and 2002), both indices continued lower by quite a bit in the second half.

 

Strong IPO Performance

The Bloomberg US IPO index measures the performance of stocks during their first publicly traded year that IPOd with a market value of at least $50 million.  Below we highlight the performance of the IPO index so far in 2009.  As shown, it is up 29.47%, while the S&P 500 is up just 1.47%.  Strong IPO performance is definitely much more indicative of a bull market than a bear market, and investors have been bidding up shares of recent IPOs by quite a bit. 

Below the chart we provide a table of the Bloomberg IPO index members.  The four that are up the most from their IPO prices are Bridgepoint Education (BPI), OpenTable (OPEN), Rosetta Stone (RST), and Duoyuan Global Water (DGW).  Only 3 of the 14 index members are down from their IPO prices.

 

 

Michigan Confidence At Highest Level Since January 2008

Michigan Confidence joins the growing number of indicators that are now at or better than Pre-Lehman levels.  Today's reading of 70.8 is actually the highest since January 2008.  This month's reading is also the fourth consecutive month-over-month increase in confidence.  A reading of 70.8 is still well below the monthly average of 86.8 since 1978, but it's also nicely above the level of 55 that we saw in late 2008.

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VIX Makes A New Short-Term Low

Yesterday's equity market rally sent the VIX volatility index to a new short-term low of 26.36.  While the VIX made a new low, the S&P 500 still has a ways to go before taking out its recent highs.  Hopefully the VIX is a leading indicator that the rally is set to continue.

 

Bulls As Elusive As A Maria Belen Shapur Photo

Following a market decline of less than 6% from its highs, sentiment of individual investors is at its most bearish level since the March lows.  Based on this week's survey from the American Association of Individual Investors (AAII), 28% of investors are bullish while 48.8% are in the bearish camp.  The current bull-bear spread of negative 20.8% is the lowest level since the week ending March 12th.  While single-day market declines of 6% were commonplace less than six months ago, given the scars of the bear market, a multi-week pullback of less than 6% is enough to send the bulls heading for the hills.

 

Two Strategists Up Their 2009 Price Targets

Each week Bloomberg surveys Wall Street strategists for their year-end S&P 500 price targets.  Since we last updated our table highlighting the various price targets a few weeks ago, two firms have upped their year-end numbers.  Deutsche Bank's Binky Chadha upped his price target from 900 to 1,060, while Morgan Stanley's Jason Todd upped his from 825 to 900.  The average year-end target for the S&P 500 is now 968, which is 5.59% above the index's current level.

 

The Market Has Loved Fed Days

After declining over the past couple of weeks, the market could sure use a Fed day -- at least based on its reaction to the last 4 Fed days.  As shown below, the S&P 500 went up 5.14%, 3.36%, 2.09%, and 2.16% on these days going back to last December.  With the index already up 1.4% heading into the noon trading hour, it looks like traders are anticipating another positive finish following the 14:15 ET FOMC statement.

  

Breadth Gets Bad

Heading into today, the percentage of stocks in the S&P 500 trading above their 50-days took a major turn for the worse.  After trading above the 50% level for a few months, this breadth indicator dropped all the way down to 39%.  And the drop was even worse for certain sectors.  In the Energy sector, just 13% of stocks are above their 50-days after being near 100% just a couple of weeks ago.  Industrials dropped down to 21%, Consumer Discretionary dropped to 23%, and Financials, Materials, and Telecom dropped to the low 30s.  Consumer Staples, Health Care, and Utilities (all defensives) are the only sectors with a breadth reading above 50%.  Talk about a quick pullback.