Bespoke Investment Group

S&P 500 Up 5 Days In A Row To Start The Year

The S&P 500 closed up every trading day this week, which also means we have started 2010 up five days in a row.  Since the S&P 500 started back in 1927, there have only been three other years where the index closed up five days in a row to start the year -- 1967, 1987, and 2006.  In 1967 and 2006, the winning streak ended at 5 days, while in 1987 it ended after 7 days.  As shown below, the rest of January following the five-day winning streak was positive twice and negative once, with an average return of 3.45%.  The rest of the year was positive twice and negative once as well, with an average return of 7.49%.  At any rate, let's hope 2010 turns out to be more like 1967 and 2006 and not 1987.

 

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One Week Into the New Year

With just a week of the new year gone by, there's still plenty of time to gain the essential information needed to help shape your investment strategy in 2010.  Last week we released our 2010 Bespoke Report to Bespoke Premium subscribers.  The Bespoke Report is one of our most popular publications that covers anything and everything that investors need to know heading into the new year.  Below is the table of contents from this year's piece.  To view the report, simply subscribe to Bespoke Premium today!

 

Most and Least Volatile Stocks on Earnings

The fourth quarter earnings season starts on Monday with Alcoa's (AA) report after the close.  Prior to each earnings season, we highlight the stocks that have historically had the biggest and smallest one-day reactions to their earnings reports.  To do this, we grab every earnings report for every company that has reported since 2002 and calculate its average absolute 1-day change on the first day of trading following the earnings release.  For companies that report in the morning, we use its change on that day, and for companies that report after the close, we use its change on the following day.  The absolute change turns negative moves positive, so if a company is up 20% on one earnings report and down 10% on another earnings report, its average absolute change for both reports would be 15%.

Each of the companies listed below has at least 5 earnings report under its belt.  Along with the average abolute change, we also include its current price, expected report date, and the time of day of the report.  As shown, GT Solar (SOLR) has historically been the most volatile stock on earnings in our database with an average absolute one-day change of 17.76%!  SunPower (SPWRA) is not far behind at all with a one-day change of +/-17.47%.  Other notables on the list of most volatile stocks on earnings include Intuitive Surgical (ISRG), NetFlix (NFLX), SanDisk (SNDK), and Amazon.com (AMZN).  Remember, this does not mean the stocks typically go up a lot on their earnings reports -- it means they typically move a lot in either direction on their earnings reports.  To find stocks that have historically gone up a lot or down a lot, we offer plenty of in-depth earnings season reports to Bespoke Premium members throughout the reporting period.  There simply isn't a better place to go to track earnings than Bespoke Premium.

The stocks below have historically been the least volatile stocks on their earnings reports.  Quite a few of the names are in the Utilities sector, whose stocks usually move very little based on quarter to quarter numbers.  Other notables on the list include Atria Group (MO), Johnson & Johnson (JNJ), McDonald's (MCD), and Procter & Gamble (PG).

 

Google Struggling on High Volume

Ever since the release of their Nexus One phone, Google's (GOOG) stock price has really struggled.  And it has struggled on very high volume.  As shown below, the stock is quickly approaching its 50-day moving average, so it will need to hold that support to not break below its uptrend channel.  If it breaks below its 50-day, the stock might have a tough time over the next couple of months.

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Non Farm Payrolls: Beggers Can't Be Choosy

Even though today's non-farm payrolls report was weaker than expected (-85K vs 0K est.), November's report was revised from a loss of 11K to a gain of 4K.  Unless this reading is revised again next month, November's gain (albeit small) puts an end to the longest monthly streak of job declines since at least 1940.  Beginning in January 2008, the US economy posted a record 22 consecutive months of job losses for a total decline of 7.16 mln jobs.  If we include December's losses in the calculation, the US economy has now lost 7.24 mln jobs over the last two years.

Given the fact that the US economy just went through its longest streak of monthly job losses in at least seventy years, there really is no way to sugarcoat the misery in the US labor force over the past 2+ years.  Even if we look at the data based on a percentage of the US workforce, the declines are among the highest ever.  Over the last two years, total nonfarm payrolls are down 5.24%.  The only other time where we saw a larger decline over a two-year stretch was back in 1946, when total non-farm payrolls declined by nearly 10%.  However, we would note that back in 1946 we were transitioning out of a war time and into a peace time economy.  At any rate, the numbers are clearly trending in the right direction now and the worst definitely appears to be over for this cycle.

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Tech and Financials Role Reversal

The fourth quarter trend of Tech outperforming Financials has been completely flipped on its head in the first week of 2010.  The charts below highlight the relative strength of the Financial and Technology sectors versus the S&P 500.  For each series, the rising line indicates the sector is outperforming the S&P 500 and vice versa.  For the entire fourth quarter, Technology (red line) led the market while Financials (blue line) lagged, but with the change of the calendar came a change of pace.  Now, Financials are leading the pack as stocks like Goldman Sachs (GS) escape the 'Whitney Effect', while names like Google (GOOG) can't seem to get out of their own way.

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High Yield Bonds Continue To Do Well

Over the past month or so, the only area of the bond market that has done well is junk.  Both Treasuries and investment grade corporates have struggled, while high yield bonds have continued to surge.  Below we highlight a six-month performance chart of the high yield bond ETF (HYG) and the investment grade corporate bond ETF (LQD).  As shown, HYG is up 18.17% over the last six months, while LQD is only up 5.50%.  You can see a clear split in performance (shaded in gray) at the start of December, where HYG continued to trade higher and LQD began to trade lower.

Retail Stock Performance

The S&P 500 Retail group is up nicely since both the March 9th lows and the start of the shopping season in November.  Below we highlight the performance of the 30 stocks in the group over both time frames. 

Since the start of November, Sears Holdings (SHLD) is up the most with a gain of 47.44%.  Priceline.com, RadioShack, Nordstrom, Bed Bath & Beyond, and Lowe's are all up more than 20% since the start of November as well.  Only five stocks are down since November 1st -- Macy's, The Gap, Kohl's, GameStop, and JC Penney.  GameStop is the only stock in the group that is down since November and since the start of the bull market on March 9th.

 

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A Billion Dollar Day for Eddie Lampert?

Sears Holdings raised guidance by quite a bit this morning, and the stock is currently up $13.63 in pre-market trading.  As the majority owner of SHLD shares, Eddie Lampert stands to make a fortune today.  As of their last filing, Lampert's firm owned 66,024,366 shares (57.13% of the company).  A gain of $13.63 in the stock translates into a gain of $899,912,109 for Lampert.  For Lampert to have a billion dollar day in SHLD, the stock needs to close up $15.15.

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Trade of the Day Performance: Up 42.8% in 2009

One of the products included in our Bespoke Premium research service is our daily Trade of the Day report where each day we highlight a single stock that looks attractive based on the myriad of metrics we incorporate into our analysis.  Many Bespoke followers have recently asked for the performance of this report, and we highlight the results below.

With 2009 now complete, we went back and tallied the performance of all Trade of the Days to see how they performed versus the S&P 500.  In 2009, the cumulative return of our Trade of the Day ideas was +42.8%* (not including commissions and/or fees) compared to the 26.9% return of the S&P 500 tracking ETF (SPY).  As shown in the chart below, the cumulative return of our Trade of the Day throughout 2009 was consistently above the $1,000 starting amount, even as the S&P 500 was down 25% at its lows in March. 

The second chart below highlights the individual weekly returns of each day's idea.  Our three biggest winners of the year were ESI (1/15: +27%), MOS (2/3: +27%), and CHIC (8/18: +26%), while the biggest losers were SPAR (6/29: -37%) and TK (2/10: -18%).  Of the 246 ideas, 134 (54.5%) were profitable one week later, while 112 (45.5%) were unprofitable.  The alpha generated by the Trade of the Day was due to the margin of difference between the average performance of winners (up 5.4%) compared to the average decline of the losers (-4.5%).

Beneath the charts below, we have also provided a table with the performance of our Trade of the Day ideas over the last month.  Of the 19 ideas since 12/7, the average one week return has been 2.26% with 15 out of 19 profitable trades.  As always, we would remind readers that past performance is no guarantee of future results, and we always advise investors to do their own due diligence. 

To receive daily access to our Trade of the Day report, subscribe to Bespoke Premium today.

*For the purpose of this exercise, we calculated the returns using a one week holding period from the opening price on the day of the report (irregardless of whether or not they hit our guideline stop or target price).  Using a hypothetical portfolio of $1,000, on 1/2/09 we put one fifth of the portfolio ($200) and invested it in the first day's idea (which was GS).  After holding that position for one week, we rolled the proceeds into the Trade of the Day from January 9th. On the second trading day of 2009, we invested another $200 (one fifth of the portfolio) in that day's Trade of the Day, and held that for one week, etc...  Using this method, an investor would always be maintaining a portfolio of five stocks making one trade per day.  Please email us if you would like a spreadsheet with all of the Trade of the Day ideas for 2009.

GOOG Largest Negative Reversal Since June

After hitting a new 52-week high in the early minutes of trading, shares of GOOG have been under pressure over concerns regarding lower margins due to the Nexus One phone launch as well as Baidu's (BIDU) announcement that it will create an online video company.  The stock is currently trading down nearly 3.5% from its morning high, which would mark the largest negative intraday reversal in the stock since June 22nd.  As a result of today's sell-off, GOOG is now trading right above its 20-day moving average (DMA) of $609.  This level has acted as support in the past, so traders will we be watching to see if this holds.  If the 20-DMA level fails to hold, the next point of interest becomes the 50-DMA which currently sits at $586. 

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Bespoke's Commodity Snapshot; OJ Spikes

Below we highlight our trading range charts for ten major commodities.  For each chart, the green zone represents between two standard deviations above and below the commodity's 50-day moving average.  Moves above or below the green zone are considered extremely overbought or oversold. 

As shown in the first chart, orange juice has spiked above its trading range in recent days as Florida freezes.  OJ has been in a strong uptrend since the middle of 2009, so traders seem to have expected the cold, cold winter that the US has seen so far.

Most commodities are trading at or near extreme overbought territory at the moment.  Both oil and natural gas are right at the top of their trading ranges, and the same goes for platinum, copper, and corn.  After moving down to the middle of their ranges at the end of 2009, gold and silver have had a strong start to 2010 as well.

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S&P 500 Sector Technicals

Below we provide our six-month trading range charts for the S&P 500 and its ten sectors.  For each chart, the red zone represents between one and two standard deviations above the 50-day moving average, and vice versa for the green zone.  Throughout the entire bull market, the S&P has been moving in an upward sloping trend channel, bouncing from its 50-DMA to the top of its red zone.  As shown below, the S&P 500 is currently trading close to extreme overbought territory, but it's not quite at the level that would suggest an immediate reversal.

On the most recent rally to new highs, the defensive sectors (Health Care, Utilities, Telecom, and Consumer Staples) have traded flat to down, while the cyclical sectors have picked back up.  Energy and Materials have really moved up and are now trading at the very top of their ranges.  As we highlighted yesterday, the Financial sector has broken out of its short-term downtrend, and its move has really helped the overall market over the last week.  Technology has been and remains in overbought territory, but it has yet to show signs that a pullback is imminent.

(To track these charts on a regular basis, we offer a weekly Sector Snapshot with our Bespoke Premium service.)

Best and Worst Starts to the New Year

After three days of trading to start the new year, the average stock in the S&P 500 is up 2.14%.  Below we highlight the 30 best and worst performing stocks in the index so far in 2010.  As shown, WYNN is up the most with a gain of 15.15%, followed by GNW, NBR, TIE, DOW, F, and S.  There are 17 stocks up more than 10% already, while just one stock in the index is down more than 5% -- ICE (-5.54%).  There's a long year ahead, but the bulls can't complain about the start to 2010.

Goldman Sachs (GS) Breaks Free From the "Whitney Effect"

For much of the last two years, the last three words that a CEO of a financial firm could stand to hear in reference to their stock was, "Whitney lowers forecasts."  Today, it appeared to be more of the same when Whitney's firm lowered Q4 EPS forecasts for Goldman Sachs (GS).  However, while GS saw a short term drop following the initial headlines, the stock not only recovered but it finished at its highs of the day.

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Final 2010 Strategist Predictions

Below is a list of the 2010 S&P 500 year-end price targets of major Wall Street strategists as surveyed by Bloomberg prior to the first trading day of the new year.  As a whole, strategists are looking for a year-end price of 1,225 for the S&P 500, which translates into a gain of 9.82%.  Deutsche Bank's Binky Chadha has the highest target at 1,325, while Barclays' Barry Knapp has the lowest at 1,120.  All strategists are forecasting a 2010 gain.

 

Financials Rebound

The S&P 500 Financial sector has broken solidly above its 50-day moving average over the past two trading days, and from a technical standpoint, the sector looks poised to re-test its 2009 highs in the coming weeks.  Yesterday we noted that the overall market can rally without the Financial sector leading the way, but the fact that the sector is now turning higher is a positive.

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Bespoke on CNBC Tuesday 1/5/10 at 2:20 PM

Paul Hickey will appear on CNBC's Street Signs today at 2:20 PM ET to discuss our market outlook for 2010. 

 

To view the 2010 Bespoke Report, subscribe to Bespoke Premium today.

Paul Hickey will appear on CNBC's Street Signs today at 2:20 PM ET to discuss our market outlook for 2010. 

 

To view the 2010 Bespoke Report, subscribe to Bespoke Premium today.

Paul Hickey will appear on CNBC's Street Signs today at 2:20 PM ET to discuss our market outlook for 2010. 

 

To view the 2010 Bespoke Report, subscribe to Bespoke Premium today.

Average P/E Ratio By Decade

Even as some would have you believe that you have to be insane to buy stocks heading into 2010, there are many positive factors that investors can point to as reasons to be bullish.  However, one that you won't hear being cited is valuation.  Based on trailing earnings, the average P/E ratio of the S&P 500 during the decade that just ended was higher than any other decade in its history.  Even after declining since the turn of the century, the average P/E ratio for the the '00s rose to a record high of 20.2, and at the end of December '09 i5 stood at 27.9 (on an operating basis).

Before rushing to hit the sell button, however, investors should be aware that the currently stratospheric P/E ratio of the S&P 500 is skewed by the negative quarterly results in Q4 2008 ($-0.09).  That number will be replaced by an estimate of $16.73 in Q4 '09, which would drop the P/E ratio to a still lofty, although relatively more reasonable level of 20.1 times.  What the bulls are really banking on, though, is strong results throughout 2010.  Based on current forecasts from S&P, analysts are expecting S&P 500 earnings to rise to $74.98 per share in 2010.  With the S&P 500 currently trading at 1,130, the P/E ratio on a forward basis comes all the way down to a much more manageable 15 times.  Now all the companies have to do is deliver.

The 2010 Bespoke Report is complete!  Subscribe to Bespoke Premium to read now.

Breadth Gets Stronger

Today's rally has pushed the percentage of stocks above their 50-day moving averages in the S&P 500 up to 85%.  This is the first time it has been at this level since early on in the fourth quarter.  The fact that breadth has caught up with the new highs in the overall market is a good thing for the health of the bull market.  If it gets up near 90%, however, there won't be much more room for upside in the short term.

Technology, Health Care, Utilities, and Telecom are the only sectors with readings currently above 90%.  Consumer Staples has the lowest reading at 71%.

Apple vs Google Rivalry to Heat Up in 2010

It's been well known that the longstanding corporate friendship that once existed between Apple (AAPL) and Google (GOOG) began to fray in 2009 after GOOG CEO Eric Schmidt resigned from AAPL's board in August citing conflicts of interest.  As we enter a new decade, however, fray is looking more and more like a huge understatement.

For starters, the growing press regarding the company's self made Nexus One phone has generated a ton of buzz that the company is gunning for a war with AAPL over dominance in the cellphone market.  While this may be true, one review suggested that the Nexus One is "not really very different than the [Motorola] Droid in any substantial way."   If the Droid's lackluster reception is an accurate indication, Apple may not have a tough time beating Google in the smartphone market.

But there's more to the growing AAPL/GOOG competition than smartphones.  GOOG has also been gunning for AAPL on other fronts.  While browser wars no longer get the front page headlines that they did back during the Netscape/Microsoft days, reports now show that Google's Chrome has moved ahead of AAPL's Safari after only 15 months in existence.  Granted, MSFT and Firefox still command the bulk of market share in the browser space, but in recent years AAPL has been gaining share in most of the spaces it enters.  In addition to browsers, there are now rumors that GOOG is working on a competitor to AAPL's yet to be unveiled tablet PC.

So what does the market think about GOOG setting its sights on AAPL?  While AAPL outperformed GOOG in 2009, investors have increasingly been gravitating towards GOOG since the relationship began to 'fray' on August 3rd.  Since Schmidt resigned from the AAPL board, GOOG has actually outperformed AAPL by a margin of 37.1% to 26.9%.

The 2010 Bespoke Report is complete!  Subscribe to Bespoke Premium to read now.

Can the Market Rally Without the Financials?

One of the key questions heading into 2010 is whether or not the S&P 500 can continue to rally without participation from the Financial sector.  The chart below highlights the relative strength of Financials and Technology versus the S&P 500 in 2009.  In the chart, a rising line indicates the sector is outperforming the S&P 500, while a falling line is indicative of underperformance.  Although it was the best performing sector off the bottom in March, the Financials have been underperforming the overall market since the start of Q4 '09, while other sectors like Technology have taken the lead. 

Given that many investors are now of the view that equity rallies are led by the Financial sector, their recent underperformance has caused many to ask whether or not the equity rally will collapse under the weight of the sector.  While renewed strength in this sector would be welcome to bulls, it isn't critical.  To highlight this, we revisit the experience of the Technology sector coming out of the prior bear market in 2002/2003.  

Back then, Technology stocks were the Financials of today after the sector declined 80% following a multi-year bull run.  When the market bottomed in late 2002, Tech stocks led the initial surge off the lows.  As the rally progressed, however, Tech stocks lost their leadership, causing skeptics to argue that their underperformance was an indication that the rally was running out of steam.  In fact, during the last bull market leading up to the 2007 peak, Technology stocks underperformed the S&P 500 from the beginning of 2004 through the Summer of 2006.  During that period, investors who were waiting on tech lost out, while other sectors like Energy and Materials stepped in to fill the void.  

Instead of pre-occupying themselves with a specific sector of the market as the barometer for the overall market, investors should continue to focus on broader market measures such as breadth, volume, credit conditions, earnings, etc. as their guide.

The 2010 Bespoke Report is complete!  Subscribe to Bespoke Premium to read now.

The Best of the 2000s

Of the 2,971 stocks currently in the Russell 3,000, 1,997 of them were around at the start of the 2000s.  The average price change of these 1,997 stocks during the 2000s was 182%, so this shows you the impact of survivorship bias, given that the index itself was down for the decade.

There are 80 stocks currently in the Russell 3,000 that were up 1,000% or more last decade.  Below we highlight the 50 best performers in the index during the 2000s.  To anyone who bought MED on 12/31/99 and held it throughout the entire decade -- we salute you!

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Bespoke on Bloomberg TV Monday 1/4/10

Bespoke's Paul Hickey appeared on Bloomberg TV with Scarlet Fu this morning to discuss current market conditions and our outlook.  To view the video, click here or on the image below:

The 2010 Bespoke Report is complete!  Subscribe to Bespoke Premium to read now.