Bespoke Investment Group

Default Risk For Financials Shoots Up

During the financial crisis, we created an index that tracks credit default swap prices for the major banks and brokers across the world.  This essentially measures default risk for the financial sector.  After declining significantly for the past 9 months, the index has spiked in recent weeks to its highest level since last September.  As shown below, the downtrend line in the index has also been broken on the run-up as well.  In just a couple weeks, the fear has picked up quite a bit.

 

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What Is Getting Hit Hardest?

We broke the S&P 500 into deciles (10 groups of 50 stocks) based on stock performance in 2009 to see if the big winners from last year are the ones getting hit the hardest on the recent pullback.  As shown below, they definitely are.  The 50 best performing S&P 500 stocks in 2009 have averaged a decline of 9.5% since 1/19.  Each successive decile from best to worst in 2009 gets better in terms of performance since 1/19.  The 50 worst performing S&P 500 stocks in 2009 are only down an average of 2.9% since 1/19.  The winners during the bull run are being sold with authority.

Below are the worst performing S&P 500 stocks since the January 19th top.  US Steel (X) is down a whopping 32%, followed by Cliffs Natural Resources (CLF), Massey Energy (MEE), Freeport-McMoRan (FCX), and QUALCOMM (QCOM).  All of the names listed above are down more than 20%.

Ugly Tape

After trading up nearly 1% in the morning, the major markets have tumbled in afternoon trading.  This type of action, when the market trades sharply down even though economic reports and earnings reports both beat estimates handily, is not good.  There's simply no way to sugercoat it.  Since the start of the pullback, earnings and economic numbers have remained strong, so the market is signalling that the indices got ahead of themselves based on what's in store for earnings and the economy in the future.  The long-term uptrend is also getting very close to breaking down.  If the uptrend breaks, investors will need to reposition their portfolios, which ultimately puts even more pressure on share prices.  At any point, something can spark the market back to the upside, but for now, the short-term trend is down.

 

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Sector Earnings Beat Rate and Stock Performace

The current earnings per share "beat" rate this earnings season is 73% for all US stocks.  Below we highlight the percentage of companies in each sector that have beaten estimates.  As shown, only three sectors have a higher beat rate than the overall market -- Materials (76.7%), Consumer Discretionary (83.7%), and Technology (87%).  Two of the three sectors that are beating estimates at the highest clip are also the two sectors that have gone down the most since earnings season started.  Materials is down the most at -11.37%, while Technology is down 7.72%.  Based on this, either investors aren't paying any attention to the strong earnings, or they think that it can't get much better than this, hence sell the news.  It's probably a little bit of both.  However, guidance has been especially strong as well this earnings season, so the jury is still out on whether the earnings cycle will now turn down.

 

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Percentage of Stocks Above 50-Day Moving Averages

As shown below, the percentage of stocks above their 50-day moving averages in the S&P 500 has dropped to 35%.  This is the lowest level seen since mid-2009.  Clearly breadth has gotten weak on this pullback.  No sectors have more than 50% of stocks above their 50-days, and Consumer Discretionary has the highest reading at 48%.  Materials is the weakest sector with a reading of 10%.

 
 
 

 

 

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10-Day A/D Line For Materials At Most Oversold Level Since October 2008

The 10-Day A/D Line for the S&P 500 Materials sector is currently more oversold than at any other point since October 2008.  It is also currently showing the eleventh most oversold reading since 1990.  In the chart below, we highlight each of those occurrences (all occurred after 2000) with a red dot.  In the week following the prior ten most oversold readings, the Materials sector has averaged a gain of 2.9% with positive returns 70% of the time.

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Dow Breaks Another Support Level

As shown in the chart below, the Dow has just broken below its support level at the 10,100 mark.  This support was formed by the peak in the index in mid-October.  Some commentators have been blaming the drop on more tax proposals in Obama's State of the Union speech last night.  But even if you think this is the cause of the decline, it shouldn't really scare you too much since the proposals still have to be passed into law.  There have been many tax proposals during the rally that haven't even come close to passing.  In the current political environment, it's going to be hard for Congress to implement anything that will be interpreted as a hit to the economy, especially in an election year.  So if the market is falling because of tax proposals, it's likely to be short lived since the likelihood of actual passage is low. 

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Two 200-Day Breaks

Two big asset-classes had major long-term trend reversals today.  When a stock or index is trading above its 200-day moving average, it is considered to be in a long-term uptrend.  When the price is trading below the 200-day, it is considered to be in a long-term downtrend.  Today, the US Dollar index closed above its 200-day for the first time since last May.  China's Shanghai Composite Index closed below its 200-day for the first time since last March.  The dollar has been rallying for a couple of months now, while China has been struggling, but today's moves are confirmations that the trends could be in place for longer than some thought.

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Can't Blame Earnings Season

The earnings picture continues to look impressive.  Heading into the close yesterday, the earnings beat rate (% of companies beating EPS estimates) stood at 71%, which is high in its own right.  Last night and this morning, another 64 companies reported earnings, taking the total number of US companies that have reported since earnings season began up to 223.  As shown below, the earnings beat rate now stands at 73.5%, which would mark the highest reading for any quarter since at least 1999 if the reporting period ended today.  And even though the S&P 500 finished the day down, the companies that reported earnings last night and this morning collectively had a stellar day.  The S&P 500 closed the day down 0.42%, but the stocks that reported earnings averaged a gain of 2.40%!  The average 1-day % change for all companies reporting earnings this season stood at -0.24% coming into today, but the 64 additional companies added to the total today have bumped the overall number up to 0.52%.

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Lots on Deck Tomorrow

As shown below, 42% of stocks in the S&P 500 are currently trading below their 50-day moving averages.  This is just below the 43% reading seen at the bottom back in October, so things don't currently look great from a breadth perspective.

Tomorrow is one of those days that we see maybe 4 or 5 times a year where the market just gets pounded with information overflow.  Not only does the market have to digest more than 50 earnings reports, but it has to digest the Geithner/Paulson testimony, New Home Sales, the FOMC decision, the Apple Tablet, and last but not least, President Obama's first State of the Union address.  Get ready, because it's going to be a very active day! 

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1,091 Proves Strong Once Again

On a closing basis, the S&P 500 stopped going down right at the 1,091 level, which has acted as key support four times now since last November.  Now that the index has found support in the short-term, traders will focus on the 50-day moving average as the next level of resistance, which is about 13 points above the index's current level.

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Guidance Is Also Strong

Just like the earnings beat rate this quarter, the percentage of companies raising guidance versus lowering guidance is also strong.  As shown below, 12.6% of companies that have reported earnings this season have raised guidance, while just 2% have lowered guidance.  In the prior two quarters, we saw positive guidance outnumber negative guidance, but the current spread this quarter would beat them handily.  This number is likely to come in some as earnings season progresses, but for now, guidance looks good.

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Earnings Beat Rate At 70%

Only 150 companies have reported earnings since Alcoa kicked off earnings season earlier this month, and 70% of them have beaten analyst estimates for earnings per share.  The earnings beat rate was 68% in the prior two quarters, so beating that number was going to be tough.  But so far, companies have delivered.  With the market struggling, it appears as if investors have already factored in a healthy earnings season and are focused on other things.  If the numbers keep up at this rate, however, the strength will be hard to ignore. 

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Monday Bull Market Still Intact...For Now

For several weeks now, we have been highlighting the "Monday Bull Market" in the S&P 500.  If today's gain holds, the S&P 500 will have started off the week with a positive return in 16 out of the last 18 weeks (89%).  While weeks have had a tendency to get off to a good start, they haven't necessarily finished that way.  Since the end of September, the S&P 500 has averaged a gain of 0.83% on the first day of the week and a decline of 0.54% for the remainder of the week.  Last week the index was down 5.08% from Tuesday's close through the end of the week (Monday was a holiday).

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Sector and Stock Performance Since 1/19

The S&P 500 is down 5.08% since last Tuesday, and below we highlight the performance of the ten S&P 500 sectors since then as well.  As shown, the Materials sector is down the most at -7.90%, followed by Financials and Technology both at -6.24%.  Energy is the only other sector that is underperforming the entire index with a decline of 5.80%.  Consumer Staples is down the least at -2.79%, followed by Telecom (-3.38%) and Health Care (-3.86%).

The average stock in the S&P 500 is down 4.91% since last Tuesday, and there are 30 stocks that are down more than 10%.  As shown below, Cliffs Natural Resources (CLF) is down the most of any S&P 500 stock since 1/19 with a decline of 17.82%.  MEE, X, AKS, and AA (all Materials stocks) round out the top five worse performers.  Other notables on the -10% list include Morgan Stanley (MS), Ford (F), Caterpillar (CAT), Wynn Resorts (WYNN), and American Express (AXP).

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This Week's B.I.G. Tips Reports at Bespoke Premium

Below we provide the titles and thumbnails of the in-depth B.I.G. Tips reports we released this week.  If any spark your interest, they are all available to our Premium subscribers.  These are anticipatory, ahead-of-the-curve research reports that cover markets, economies, stocks, commodities, housing and anything else related to making people money. 

This week's B.I.G. Tips reports: Bespoke's Week in Review Newsletter (covers the fall this past week and what to expect going forward), Three 1% Down Days (what happens going forward), Financial Default Risk Breaks Downtrend (CDS prices picking back up), Back to Back Declines of 1% (what happens going forward), Euro Breaks Below 200-DMA (what this means for the dollar and stocks), Initial Thoughts on Earnings Season (so far so good), Presidential First Years (Obama has 2nd best 1st year market performance), Key Earnings Reports This Week (individual names to focus on).

 

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Bernanke Falls Victim to The Magazine Cover Curse

We've all heard about the Sports Illustrated cover curse, where athletes pictured on the cover suddenly hit a slump or develop an injury, but what about the Time Magazine cover curse?  Just one month after being named Time Magazine's Person of the Year, Fed Chairman Ben Bernanke now finds himself wondering exactly what his job is going to be come February.  How's that for a reversal?

It's Not the Size

Typically during market pullbacks, the smaller cap stocks get hit harder than the large, blue-chip names.  This hasn't happened during the 3-day pullback we've seen since the close Tuesday.  When breaking up the S&P 500 into deciles (10 groups of 50 stocks) and calculating the average performance of stocks in each decile, the deciles of the biggest stocks have performed about the same as the deciles of the smallest stocks.  At least in this go-around, the sell-off has been of relatively equal magnitude across the board, suggesting that outside motives other than typical market characteristics are contributing to the decline.

S&P 500 Now At Oversold Levels

It took all of three days for the S&P 500 to move from 2 standard deviations above its 50-day moving average to 1 standard deviation below its 50-day moving average.  Will the Massachusetts election day not only mark a major turning point in Washington, but also a major turning point for the market? 

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% of Stocks Above 50-Day Moving Averages

While the S&P 500 broke below its 50-day moving average today, the percentage of stocks in the index above their 50-days still sits at 56%.  Utilities, Telecom, and Materials are the only three sectors with less than 50% of stocks above their 50-DMAs.  Health Care has the most amount of stocks above their 50-days at 75%, followed closely by Energy at 72%.  To track this breadth indicator on a regular basis, subscribe to Bespoke Premium today.

 

 

Is the Rally Dead or Alive?

Last night, we asked readers whether they thought the S&P 500 would hold support at its 50-day moving average (DMA).  After nearly 500 votes, the majority of readers (55.3%) think the rally is over and aren't looking for the index to find support at its 50-day.

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How to Kill a Rally by Washington DC

On Tuesday the S&P 500 made a new bull market high, which put the index up 70% since the March 9th low.  In just two days, the folks in Washington have done a number of things to stop this rally dead in its tracks and put the recovery in question.  Ever since the Scott Brown Senate victory, politicians on both sides of the aisle have become stressed out about their personal futures, and they are now beginning to change their tunes.  In poker, they call this "playing on tilt," and right now it seems like many down in DC are on tilt.

First, there is now a worry that the Senate will have a tough time raising the debt limit.  There is likely no shot that this won't happen because its implications would be dire for the U.S., but nevertheless, it is a very unpopular topic right now and even a hint of a failure to pass this can get investors nervous.  Second, questions are surfacing over whether or not the Senate will be able to confirm Bernanke.  It is also likely that the Fed Chairman will eventually be reconfirmed, but investors are comfortable with Bernanke, and any doubts regarding his status are worrisome (after comments from both sides of the aisle today, maybe it isn't likely anymore).  Finally, the administration launches an all-out attack on Wall Street, seemingly acting tougher towards bankers than terrorists.  Many large-cap Financials took it on the chin yesterday (as shown below), and an attack on Wall Street is essentially an attack on the stock market since those working in the Financial sector are the ones making the majority of investment decisions.  (On a side note, we find it quite amusing that the government made sure it exited most of its positions in financial firms before announcing its new proposals.)  And given the fact that more than half of Americans own equities in some form or another, an attack on the stock market is an attack on Main Street.  Something needs to be done about "too big to fail," but rather than work together, the administration seems to have unilaterally decided on what needs to be done without consulting any of the parties involved.  Based on Barney Frank's comments yesterday, it also appears that members of Congress in the President's party were also left in the dark.  Add these three things up and you get a two-day decline of 3% for the S&P 500 and a break below the 50-day moving average this morning.  While there are some other things at work contributing to the declines (China worries, dollar rising), we believe the majority of it is due to what's going on in DC.

It is likely that none of the three things mentioned above will even play out, so we're treating the sell-off as a short-term correction that will offer buying opportunities.  However, it's never good to get investors riled up and leave them in a state of uncertainty, and that's exactly what Washington has done this week. 

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Will the 50-Day Moving Average Hold?

The S&P 500's sell-off over the last two trading days has brought the index within points of its 50-day moving average (DMA).  The last time the index traded below its 50-DMA was on November 5th.  Will this level provide support in this go around? What do you think? Cast your vote below.

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S&P 500 Back to Back Declines of 1%

The current market sell off marks only the fifth time since the March 9th low that the S&P 500 has had back to back declines of 1%.  In the chart below of the S&P 500, we show each of those prior occurrences as well as the additional decline the S&P 500 saw before making a low.  As shown, in two periods (3/20 and 3/30) the low was put in with the second day's decline.  In the other two periods, the S&P 500 saw additional declines of 3.6% (6/16) and 2.9% (10/26).

Earlier today, we put out a note for clients and looked at the market's historical performance following back to back 1% declines.  To view the report, subscribe to Bespoke Premium today.

 

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Crazy Market

The major indices are approaching the -2% level on the day, which would be the worst day for the market in some time.  While some people thought a Scott Brown win would be good for the market, it appears to be doing the opposite.  The dollar is strong today on the Brown win, which is hitting stocks (especially commodity-related stocks) hard.  As shown below, the Materials sector is down 2.39% on the day.  The Health Care sector is down the least of the ten major sectors at -0.96%.  So while the Health Care sector has benefitted for the time being, the rest of the market is taking it on the chin.

After another leg higher to the 1,150 mark, the S&P 500 has been bouncing around that level for a couple of weeks now.  While the uptrend remains, could we be in store for another sideways trading range like we saw in November as the index struggled to get through 1,110?

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