Bespoke Investment Group

Bespoke's Sector Snapshot

Below we provide our 6-month trading range charts of the S&P 500 and its ten sectors.  Moves into or above the red zone are considered overbought, while moves into or below the green zone are considered oversold.  As shown below, the S&P 500 has been trading in an uptrend within the red zone for some time now.  It typically bounces back and forth from the bottom of the red zone to the top, and it is currently at the bottom and trending higher. 

The Health Care sector has taken off over the last week and is currently trading well into extreme overbought territory.  In this regard, it's hard to ignore what a Scott Brown victory in Massachusetts might mean for health care reform.  Aside from Health Care, most other sectors have pulled back slightly lately but still remain in uptrends.

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Bespoke's Morning Earnings Report

Our Morning Earnings Report starts up today for Bespoke Premium Plus subscribers.  Along with a summary of key statistics throughout earnings season, each morning the report will provide all of the US earnings reports that were released after the prior trading day's close and so far that morning.  Based on information from our databases here at Bespoke, this report highlights a number of potential trade ideas as well.

Please click the thumbnail below to view an example of our Morning Earnings Report from the Q3 '09 reporting period.  For investors looking to stay on top of earnings season, there simply isn't a better report out there.  Subscribe to Premium Plus to receive our Morning Earnings Report on a daily basis.

Bespoke's Weekly 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.  For Think B.I.G. followers interested in sampling our Week in Review newsletter, below we provide access to our report from the first week of the year.  Click the thumbnail to read the sample report.  If you would like to subscribe and receive this week's report along with our many other unique products, please click here.

Strategists Get Stock Happy

Each week Bloomberg asks Wall Street strategists (the same ones polled for their year-end S&P 500 price targets) for their recommended portfolio allocations to stocks, bonds, and cash.  Currently, the consensus recommended stock allocation is 60.5%.  As shown in the chart below, this number has spiked significantly in recent weeks.  Throughout the financial crisis, strategists lowered their recommended stock allocations pretty much every week.  They missed the bottom, however, as the market turned before their consensus hit bottom.  During the week of the Lehman collapse, strategists were recommending that investors have 56.6% of their portfolio in stocks.  Add this as another indicator that is currently back to its pre-Lehman levels, while the S&P 500 is still has about 9% to go. 

The current reading of 60.6% is up quite a bit from its level at the market lows.  This doesn't yet suggest that strategists are too bullish, however, as their average recommendation during the '03-'07 bull market was about 64%.

New Highs For Breadth and Price

Although there have been comments made by some that the market's long-term breadth has been lagging, the cumulative breadth of the S&P 500 (sum of the daily number of advancers minus decliners over the last 6 months) finished the day at new highs.

One area where breadth has been particularly interesting is the Financials sector.  Back in October, there was a negative divergence as the sector made a new high while breadth made a lower high.  In recent weeks, however, breadth has been leading prices higher.  Even though the sector is 3% below its October high, cumulative breadth is just one positive day from making a new high, which indicates positive underlying strength as we head into the heart of earnings season.

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The Smaller the Better

The average S&P 500 stock is up 3.50% so far in 2010.  We broke the index into 10 deciles (10 groups of 50 stocks) based on market cap and calculated the average YTD percent change of the stocks in each decile to see how a company's size has impacted performance so far this year.  As shown below, the 50 biggest stocks in the S&P 500 are up an average of 2.4% year to date.  The 50 smallest stock in the index are up an average of 6.5%.  In general, the bigger the stock, the smaller the gain so far in 2010.

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Preferreds and High Yield Bonds Surge

The preferred stock and high yield bond markets have done extremely well lately.  As shown in the two charts below, PFF (preferred ETF) and HYG (high yield bond ETF) have both been surging since the start of December.

Since the Lehman Brothers collapse on September 15th, 2008, PFF is actually up 12.91%, while HYG is down just 2.89%.  With preferreds and high yield bonds now at or near pre-Lehman levels, how long will it take for common stocks to get there as well?  As shown below, the S&P 500 is still 8.7% below the 1,251 level it closed at on 9/12/08. 

 

Estimated Q4 S&P 500 and Sector Earnings Growth

S&P 500 earnings are currently expected to grow by 62.1% in Q4 '09 versus Q4 '08.  In the first chart below, we highlight how this growth estimate has changed since the start of the fourth quarter.  As shown, estimates are essentially right where they were at the start of Q4, but there was a lot of movement in the estimate throughout the quarter.  From October to the end of November, the growth estimate rose on a weekly basis all the way up to 75.7%.  Since peaking, however, estimates headed lower by quite a bit until finally bumping up from 60% to 62.1% in the last week.  As we enter earnings season, it's probably a good thing for the bulls that expectations have come down a little.

While the S&P 500 as a whole is expected to grow by 62.1% in the fourth quarter, the bulk of this growth is expected to come from the Materials and Financial sectors.  As shown below, these are the only two sectors with Q4 growth expectations that are higher than the S&P 500.  And more sectors are still expected to see a decline in earnings than a rise.  Energy and Industrials are both expected to see earnings decline by more than 20% in the fourth quarter, while Telecom is not far behind at -19.2%.  Health Care, Consumer Staples, and Utilities are all expected to see a drop of about 5%.  Technology and Consumer Discretionary are the other two sectors expected to see growth.

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Volatility At Lowest Level Since May 2008. Should You Care?

Now that the VIX index is at its lowest levels since May 2008, and down nearly 80% from its record high in late 2008, there is a growing concern among some investors that there is not enough fear in the marketplace.  As the chart below indicates, the current level of 17.55 is lower than the long-term average of 20.3 since 1990.  However, during the mid-nineties and the middle part of this decade, which were both good periods for equity investors, the VIX not only traded at and below current levels, but it also remained at those levels for several years. 

While the VIX's decline over the last year indicates that investors are not as fearful as they were a year ago, can you blame them for not being so? Things haven't quite returned to normal, but they are a lot closer now than they were then.

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The Monday Bull Market Continues

Although it was one of the smaller Monday gains in the last three months (0.17%), today's advance in the S&P 500 keeps the 'Monday Bull Market' rally intact.  As shown below, the S&P 500 has now seen gains on fourteen of the last sixteen Mondays with an average change of +0.81%.  The index's average rest of week performance has been a decline of 0.21% with positive returns only half of the time.  If it weren't for Mondays, we would be staring at a much different market picture.  (Click here to view a B.I.G. Tips report that we sent out to Premium subscribers last week on this topic.)

With today's advance, the S&P 500 is also now up six days in a row.  The only other time the index started off the year with a winning streak of six or more days was back in 1987 when the first seven trading days of the year were all positive.

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The Market Heading Into Earnings Season

The S&P 500 is up more than 5% this earnings off-season, which is the biggest off-season gain since mid-2007.  Below is a chart of the S&P 500 with earnings seasons highlighted in green and off-seasons highlighted in red.  The first earnings season on the chart was the Q1 '09 reporting period in which the S&P 500 gained 9.5%.  The following off-season saw a flat market, and then the Q2 '09 reporting period saw another big gain of 15%.  The market then continued higher throughout the next off-season, and then traded essentially flat during the Q3 '09 earnings season.  We're heading into this earnings season on a high note for the market, so the question now is whether this batch of reports can propel stocks even higher or if we're due for some sideways action like we saw last reporting period.  Stocks surely have a lot to live up to this time around, but don't they always?

Bespoke Premium is the number one place to stay on top of earnings season.  Click here to subscribe.

 

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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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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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.)

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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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%.

54% Bullish on 2010

Earlier in the week we asked Bespoke readers to take part in our 2010 market poll.  A lucky 711 of you took part, and as shown below, 54% think the S&P 500 will be up in 2010 and 46% think the index will be down.  The majority of Bespoke readers are bullish, but this is far from overly optimistic.  Thank you to everyone who took part!

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

The Worst of '08 Have Been the Best of '09

With the year coming to an end today, we broke the S&P 500 into deciles (10 groups of 50 stocks) based on stock performance in 2008 to see what impact it had on performance in 2009.  Many of the stocks that got hit the hardest last year came roaring back this year, and the numbers below help quantify this.  As shown, the 50 stocks in the S&P 500 that did the worst in 2008 are up an average of 101% in 2009!  The 50 stocks that did the best in 2008 are up an average of just 9% in 2009.  2009 was definitely a year when buying the losers worked.

Read more about 2009 and the outlook for next year in our 2010 Bespoke Report, which will be released to Bespoke Premium subscribers this afternoon.

Last Day Blues?

Since 1901, the Dow has averaged a gain of 0.33% on the last trading day of the year.  This is significantly better than the average change of 0.03% for all trading days since 1901.  Over the last 25 years, however, the Dow has struggled on the last trading day of the year, averaging a decline of 0.22%.  Prior to the 1.25% gain on the last day of 2008, the Dow had been down on the last day four years in a row.

 

Dow Yield Versus Treasury Yield

There has been quite a bit of chatter recently about the widening spread between the yield on 10-Year Treasuries and the dividend yield for stocks.  Currently, the 10-Year Treasury Note is yielding 3.84% versus the Dow's dividend yield of roughly 2.6%.  One of the arguments for stocks at the bottom of the bear earlier this year was that they were yielding more than Treasuries.  As shown below, that hadn't happened in nearly 50 years.  The consensus for 2010 is that stocks will rise (dividend yields lower) while the 10-Year yield will rise as well.  This would make the spread tick lower into the "red zone" in the chart below.  You be the judge on whether this will be a negative for stocks or not.

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The Tech Market

Since the market broke out of its trading range last week, the Nasdaq has significantly outperformed the S&P 500 and Dow 30.  As shown below, the Nasdaq is now up 4.02% since November 16th versus 1.43% for the S&P and 1.07% for the Dow.  For the year, the Nasdaq is up 45.28% versus 25% for the S&P 500 and 20% for the Dow.  And since the market hit its all-time highs on October 9th, 2007, the Nasdaq is now down just 18.3%.  The Dow is down 25.5% since then and the S&P 500 is down about 28%.  If it weren't for tech, things would look a lot worse.

Up or Down in 2010?

Our Bespoke Roundtable participants mostly think the S&P 500 will be up in 2010.  As we head into the new year, we'd like to get a consensus from Bespoke readers as well.  Please answer whether you think the S&P 500 will be up or down in 2010 in the poll below.  We'll report back with the results at the end of the week.  Thanks for taking part!

Will the S&P 500 be up or down in 2010?
	Up
	Down
Free polls from Pollhost.com

Valuation Ticks Higher

The most recent new high for the S&P 500 has been accompanied by a big tick higher in the trailing 12-month P/E ratio.  We'll definitely need to see some earnings growth in 2010 for this rally to continue.

Don't miss the 2010 Bespoke Roundtable.