Bespoke Investment Group

A Tough Month With A Strong Finish

For those of you who read Think B.I.G but are not Bespoke Premium subscribers, below we highlight the B.I.G. Tips reports we published for our members this week.  These reports are released throughout the trading day and provide unique, actionable advice on equity markets and individual stocks.

11/26

Opposite Extremes: Stocks Oversold, Bonds Overbought - A look at equity and fixed income performance following similar periods when the two assets have seen extreme divergence.

Updated NYSE Short Interest Data - A list of the most heavily shorted stocks in the NYSE along with the stocks with the biggest increases and decreases in short interest.

S&P 500 10% Corrections - An in-depth look at the market's recent 10% correction and what investors should expect going forward.

11/27

Getting Close to a Bottom? - A comparison between the bubbles of the Nasdaq and Homebuilders.

US Recessions - A unique look at the likelihood of a recession based on the recent performance of stocks.

11/28

Bottoms Up? - Do strong up days after reaching the 10% correction territory mean the declines are over?

Earnings vs Treasury Yields - A compelling analysis that favors equities.

11/29

DELL and OVTI Earnings - Analyzing each stock's prior reports to get prepared for this quarter's release.

AAII Bearish Readings Above 55% - What does this negative sentiment mean for stocks?

11/30

What are the Housing Futures Predicting? - Analyzing the current outlook for real estate.

The First of the Month - The market has some rather intriguing returns on these days.

Bespoke Premium subscribers received all of these reports this week along with the many other products we release daily.  Click here to subscribe today.

Below we highlight the performance of key ETFs over the last day, week and month.  Have a great weekend!

Monday's ISM Report

Monday morning at 10am, we get a read on November manufacturing with the release of the ISM report.  Readings above 50 indicate growth while readings below 50 imply a contracting economy.  With the consensus forecasting a reading of 51.5, expectations are calling for very modest growth.

In our Database of Economic Indicators we track how the market reacts to over 35 different economic indicators based on how they come in versus expectations.  Below we highlight the overall summary for the S&P 500 and its sectors on ISM report days.  As the results illustrate, weaker than expected reports are more common (56.6%) than stronger than expected reports (41.6%).  The average performance of the S&P 500 and each of its sectors is also better on days when the report is weaker than expected as opposed to when it is stronger.

Global Interest Rates: Is This An Inflationary Picture?

Below we update charts of long-term global interest rates versus their normal trading ranges.  While the Fed and major global central banks still talk about excessive levels of inflation, the bond markets of these regions are telling a very different story.  In each of these regions, long term interest rates are at the lower end of their typical trading range implying that bond investors are not too concerned about inflation.

 

Motorola: Another CEO Bites the Dust

This morning Motorola (MOT) announced that Ed Zander would be stepping down effective January 1st after nearly four years on the job.  MOT investors apparently like the news as the stock is set to open up 4.22%.  Interestingly, over the last four years, MOT has had only one other move of exactly 4.22%.  That occurred on December 16, 2003, which was the day the company announced that Ed Zander would become CEO.

Dude, You're Stock's Tanking -- DELL Down on Earnings

Dell (DELL) is currently trading down $2.96 in the pre-market after reporting earnings yesterday evening.  From the Bespoke Earnings Report Database, we pulled out all prior times where DELL has gapped lower at the open following a weak earnings report.  Since the end of 2001, the stock has gapped down on earnings 12 times out of 24 reports (50% of the time).  Of those 12 times, the stock has gone higher from the open to the close 9 times or 75%.  The average change of the stock from the open to the close on these 12 days has been 0.89%.

Are you interested in similar analysis for different stocks?  Email [email protected] to learn more about the Bespoke Earnings Report Database. 

Positive S&P 500 Internals; Financials, Consumer Discretionary Bottoming?

Even though the S&P 500 recently had its first 10% correction since 2003 and tested its August lows, its 10-day advance/decline line (number of stocks advancing minus number of stocks declining) actually held up rather well.  This "higher low" in market breadth provides underlying strength in the index and makes the recent bottom an even stronger support level.

What is even more compelling is that the two sectors that have been the weakest recently -- Financials and Consumer Discretionary -- also made "higher lows" on their 10-day advance/decline lines.   

      

Current Fed Funds Rate Odds

After Fed vice chairman Donald Kohn spoke on Wednesday, investors bet more and more that the Fed Funds Rate would be cut once again at the December 11th FOMC meeting.  We checked in with our trusty prediction market site, Intrade, to see where traders are currently putting their money in regards to the Fed Funds Rate.  Currently, the contract for the Fed Funds Rate to be on or over 4.50% (the current rate) at the end of 2007 is trading at 20, meaning the odds for the Fed to leave rates at 4.50% at the next meeting are 20%.  The contract for the Fed Funds Rate to be on or over 4.25% at the end of 2007 is trading at 85, putting the odds of a 50 basis point cut at 15%.  If you don't think the Fed will cut by 50 bps, you can buy the contract by putting up 85 cents to end up with $1 if you're right.

Can GDP Turn Negative After Two Quarters of Strong Growth?

Lately, whenever the debate surrounds whether or not the US economy is on the verge of a recession, one of the arguments we frequently hear against a contraction is that GDP doesn't turn negative after two consecutive quarters of growth in excess of 3.5%.  Looking at the historical record though shows that there have actually been three different periods where GDP turned negative after two consecutive quarters of 3.5%+ growth (Q3 59, Q3 73, and Q2 81).  We point this out not to say that we think GDP will turn negative this quarter, but instead to point out that it would not be an unprecedented event.

Analyst Ratings -- Which Stocks Have the Most Buys/Sells?

We recently gathered the analyst ratings for each stock in the S&P 1500.  As shown in the first chart below, largecap stocks currently have the highest percentage of buy ratings at 49%.  Midcap stocks have 43% buy ratings, while smallcaps have 45%.  Largecaps also have the lowest amount of sell ratings at 6%.  On a sector basis, Financials have the least amount of buy ratings at just 36%, while Energy stocks have the highest at 54%.  The bearishness among analysts on Financials is not surprising given the sector's poor performance in recent months.  If anything, this negative sentiment should be good for the sector, because it can't get much worse.  Any news that isn't completely terrible will begin to be treated positively. 

Below we highlight the stocks in the S&P 1500 with the highest percentage of buy and sell ratings.  We only looked at stocks that have at least 10 analysts covering them.  As shown, only two in the index have 100% buy ratings -- SPN and TMO.  PCP, GES, TGI, UTX, HLX, GOOG, DV and CELG round out the top ten.  We generally treat sentiment as positive as this as a negative since it can't get much better.  It means the stocks have no room for error on the earnings front.    

UTI, THC, LEN, F, PAS and NYT have the highest percentage of sell ratings in the S&P 1500.  The majority of stocks on this list are down big on the year, because analysts lower ratings as performance drops.  Interestingly, PAS is up 62% on the year, but 40% of analysts still have a sell rating on the stock.  This suggests the stock's run may still have legs.

    

Watching Oil's Support and Resistance Levels

Oil is currently up $1.50 to $92.50/barrel.  The commodity has gotten very close to $100 twice now and failed to break through.  Oil has tested its $90 support level twice now as well.  Currently, the commodity is trading in a range between $90 and $100.  Each time the commodity tests its support or resistance, it means the eventual break through either of them will be more dramatic.  We saw the same thing happen to the S&P 500 when it finally broke below the 1,490 level.

So we want to know what our readers think is in store for Oil.  What will happen first -- a break above $100 or below $90?  Please let us know by taking part in our Oil poll below.  Thanks for participating! 

What Price Will Oil See First?
	>$100
	<$90
Free polls from Pollhost.com

Sector Relative Strength

Below we highlight the relative strength of each to the ten S&P 500 sectors over the last year.  In each chart, rising lines indicate periods where the sector is outperforming the S&P 500.  Charts with red shading indicate that the sector has underperformed the S&P 500 over the last year.  Finally, in each chart we have also included red dots which indicate the three Fed rate cuts since August.

Of the ten sectors, only two (Consumer Discretionary and Financials) have underperformed in the last year, and neither of these sectors have seen any noticeable benefit from the three Fed rate cuts.  Interestingly, the three sectors which have been the most positively impacted are Consumer Staples, Health Care, and Utilities, which are all defensive in nature.  This implies that at this point in the easing cycle, investors are not too optimistic that the Fed rate cuts will boost the economy.

 

Back to Back Gains of 1.5%

Yesterday's 2.8% gain on top of Tuesday's1.5% gain in the S&P 500 marks the first back to back gains of at least 1.5% since February 2003. While recent experience would imply that these types of back to back gains are rare, they were relatively common in the late nineties and early 2000s.  From 1996 to 2003 (a period covering a bull and bear market), there were actually 22 different occurrences of similar back to back gains.

Best and Worst Stocks Over the Last 2 Days

The Russell 1,000 is up 4.31% since Monday's close.  Since then, 904 stocks in the index are up and just 94 stocks are down.  Below we highlight the 25 best and worst performing stocks in the index since the 11/26 close.  As shown, THC and VMW are tied for first with gains of 22.75%.  These two stocks are followed by CBG, FRE, ATVI, ACF, MGI, SPLS and ETFC.  In the table we also include each stock's performance from the 10/9 market top to the close on 10/26.  Of the list of best performers, just 4 of the best performing stocks over the past two days were up from 10/9 to Monday's close -- THC, ISRG, WFR and SPWR.  These names have recently done well during both market declines and rises.

When the market has gains like this, it's tough for investors who own stocks that are down.  But there are always sure to be some.  BARE leads the list of losers over the past two days at -14.76%.  BARE is followed by IAR, MBI, WNR, ABK and MRVL. 

 

S&P 500 2% Up Days: What Happens Next?

Below we highlight the average returns of the S&P 500 on the day and week following a one-day move of 2% or more.  While the average next-day change on a 2% up day since 1945 is 0.33%, during the current bull market, the next day change has been just 0.02%.  Over the next week, however, the average change in the S&P 500 has been 0.57% during the current bull.  While many might expect a bit of a reversal on the day following big gains, there is actually a slightly positive bias.

    

Two Up Days in a Row!

With the Dow on pace to trade in positive territory for the second day in a row, the index will break its streak of 20 trading days without two consecutive up days.  In the table below, we calculated each period since 1970 where the Dow had a similar streak of at least twenty days.  For each period, we calculated how the index did during the month before the streak was broken (includes the performance during the two up days) as well as how it did following the second up day.

Today's Market Performance

Many are calling today's rise a short covering rally, so we broke the Russell 1,000 into deciles based on a stock's short interest as a percentage of float to see how each decile is performing today on average.  As shown in the chart below, the decile of the most heavily shorted stocks has gained the most today, up an average of 3.06%.  As we work our way down the chain to the decile of the least shorted stocks, the average change on the day gets smaller.  So yes, the most heavily shorted stocks are up the most today, but we wouldn't necessarily call it a short-covering rally.  As our Bespoke Short Interest Index shows, the most heavily shorted stocks always outperform when the market rallies.

Best Growth Plays in the Nasdaq 100

Below we highlight the 25 stocks in the Nasdaq 100 with the lowest PEG ratios based on next year's earnings estimates.  The PEG ratio compares a company's P/E ratio to its long-term growth rate.  Many investors like to see a PEG ratio lower than 1 when analyzing a growth stock.  MICC currently has the lowest PEG ratio in the index at 0.43.  This means its long-term growth rate is more than double its P/E ratio.  While the stock is already up 90% year to date, its valuation still looks attractive.  MICC is followed by UAUA, NIHD, FLEX, SEPR and LRCX.

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Comparing Sector P/E Ratios

Below we highlight the current P/E ratios of the ten S&P 500 sectors and compare them to their bull market medians as well as where they stood at the start of the bull and at the recent 10/9/07 peak.  We have sorted the list by where current P/E ratios are versus their bull market medians.  As shown, Industrials are now the most below their bull market median, followed by Consumer Discretionary and Financials.  The S&P 500 P/E ratio is currently at 17.79, 1.45 points lower than its bull market median of 19.24.  At the start of the bull, its P/E ratio was 25.73.  As we've mentioned in the past, this is the only bull market where P/E ratios have actually contracted. 

Bespoke Readers Are Bullish Through 2007

Last Friday, we asked our readers where they thought the S&P 500 would end the year.  The results below clearly show that Bespoke sentiment is bullish.  This is in contrast with other sentiment levels including Consumer Confidence, AAII Investor Sentiment and State Street Investor Confidence that have all become bearish.  Bespoke readers are betting that recent declines in the markets are overdone and a year-end rally will still take place.  Let's hope they're right.

 

Fixed Income ETFs All Overbought

Below we highlight our list of fixed income ETFs that we analyze in our daily ETF Trends report available to Bespoke Premium subscribers.  Along with the information below, we provide a Bespoke Trend score and a Bespoke Timing score for each ETF so subscribers can see our current outlook on ETFs across all asset classes.  After posting sharp gains in recent weeks, fixed income ETFs finally declined some today, but they still remain well into overbought territory.  TLH and TLT, both long-term Treasury ETFs, are currently the most overbought.  For investors using asset allocation strategies, now is a good time to see if your fixed income weightings have moved too high.

 

Bespoke Premium Research

Some of Bespoke Premium's research on market corrections was used in articles on Bloomberg and in the Chicago Tribune today.  Be sure to visit our Bespoke In The News page to view other articles and headlines featuring Bespoke.  If you find the work we do on Think B.I.G. to be useful, you're sure to enjoy Bespoke Premium.  Our subscription service provides unique research for both short-term traders and long-term investors.  In the right sidebar of this page, you'll find samples of just a few of the reports we offer on a daily basis.  We also offer Money Management services as well as custom services for institutions.  If you're having trouble navigating this market, Bespoke Premium can help.  Try out a one-month subscription today!

Global Equity Market Declines

Below we highlight global equity market declines from recent peaks.  As shown, China is currently off the most from its highs -- down nearly 21%.  Sweden, Japan and Italy are also down more than 15%.  Spain, Australia, Russia and Germany have held up the best, while the Nasdaq and the S&P 500 are just about in the middle of the global spectrum.  With US subprime woes widely regarded as the cause of these global equity market declines, it's clear that the US still matters -- a lot.

 

Large Monthly Declines in the S&P 500

If the month were to end today, November would be the 7th worst performing month for the S&P 500 since 1980.  Below we highlight months where the S&P 500 has been down 5% or more along with the index's performance over the next month and three months.  Overall, the median % change of the index in the month following declines of at least 5% is 0.45%, with gains 53.85% of the time.  Over the next three months, the index has been up 70% of the time with a median change of 3.11%.

   

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Don't Look Now, But China Is In A Bear Market

China's raging bull market that saw the Shanghai Composite rise 502% from 7/11/05 to 10/16/07 has officially ended when using the standard 20% threshold.  The index is now down 20.1% from its closing high reached on the 16th.  We went back and looked at historical bull and bear markets of the Shanghai Composite and found that the average bear market lasts 151 days with a median decline of 30.59%.

   

*A bull market is a 20% rise that was preceded by a 20% decline.  A bear market is a 20% decline that was preceded by a 20% rise.

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US Recessions: 1980 - 2007

As debate over whether or not the US is on the verge of a recession, we would remind investors that waiting for the economists to tell us we are in one is probably not the best advice.  The time-lines below highlight the four recessions in the US economy since 1980 (red line).  In each chart we also show the date (blue dot) when the National Bureau of Economic Research (NBER) declared that the US economy was actually in a recession.  While the NBER was pretty timely in its recognition of the recession that began in Summer 1981, they were late to the game in the remaining three.  In fact, during the last two recessions, the NBER did not officially declare the start to a recession until the recession had already ended.