Weaker Than Expected Empire Manufacturing

Bulls looking for some confirmation of recent better than expected economic data did not get it this morning from the Empire Manufacturing report (or for that matter, Industrial Production and Capacity Utilization).  While economists were forecasting the headline reading to increase from +3 to +4, the actual reading came in weaker than expected at -1.4, and it represented the lowest reading since January.

This month's reading showed broad based weakness as seven out of the ten subcomponents were negative and none of the categories showed an increase versus April's reading.

While Prices Paid currently has the highest reading at 20.5, it also saw the largest decline on the month as it was at a level of 28.4 last month.  After Prices Paid, the next largest decline came in the Average Workweek, which fell from 5.7 in April to negative 1.1 in May.  The decline in the average workweek comes on the heels of the Non-Farm Payrolls report two weeks ago, where the average workweek also showed a sizable decline.  It is still early, but this could be an early indication that employers are cutting hours in an effort to stay below the thresholds that would require providing health coverage under the Affordable Care Act.

The charts below show the historical readings of the headline Empire Manufacturing report (top chart) and the outlook for Technology and Capital Spending (bottom chart) going back to 2001.  As shown in the top chart, the Empire Manufacturing report has been making a series of lower highs since the initial spike off the 2009 lows.  While the index seems to always bounce at similar levels (around negative 10), each subsequent bounce has been less robust. This is a trend that has also been evident in the outlook for Tech and Capital Expenditures.

S&P 500 Stocks Farthest Above 50-DMAs

The market is on quite a run right now, and it has pushed 90% of the stocks in the S&P 500 above their 50-day moving averages.  Below is a list of the 40 stocks in the index that are the farthest above their 50-days at the moment.  Keep in mind that 10% above the 50-day is pretty high, so the fact that all of the stocks shown below are more than 11.5% above their 50-days is pretty crazy.

As shown below, Advanced Micro (AMD) tops the list at more than 50% above its 50-day!  First Solar (FSLR) ranks second at 44.58% above, followed by Regeneron Pharma (REGN), GameStop (GME) and Actavis (ACT).  Other notables on the list include Netflix (NFLX), JC Penney (JCP), Biogen (BIIB), Whole Foods (WFM), Coach (COH), Disney (DIS) and Yahoo! (YHOO).

While the S&P 500 is up 15.5% year to date, the average stock in the index is now up 18.07%, meaning an equalweighted index of the 500 names is doing better than the regular cap-weighted index.  Below is a list of the 40 best performing S&P 500 stocks year to date.  Netflix (NFLX) currently ranks first with a huge gain of 150.98%, followed by Best Buy (BBY), Advanced Micro (AMD), Micron (MU) and Celgene (CELG).  Other notables on the list of 2013's big winners include Biogen (BIIB), Hewlett Packard (HPQ), TripAdvisor (TRIP) and even Campbell Soup (CPB).

S&P 1500 Most Heavily Shorted Stocks

Short interest figures for the end of April were released late last week, and below we provide a table of the stocks in the S&P 1500 with the highest short interest as a percentage of float.  Topping this month's list are shares of Blyth (BTH), which has more than two-thirds of its free-floating shares sold short.  While BTH may not be a household name, there are plenty of more recognizable names on the list, including Coinstar (CSTR), JC Penney (JCP), Gamestop (GME), SUPERVALU (SVU), 3D Systems (DDD) and US Steel (X).

For the 25 names listed below, we have also calculated their performance since 4/30.  To bring home the point about how hard it has been to be short the market in recent weeks, only three of the stocks (BTH, CRR, and COCO) are down so far in May.  Overall, the average performance of the stocks on the list is a gain of 6.75%, which is nearly three times the gain of the overall S&P 1500 (2.33%).  This doesn't even include shares of Tesla (TSLA), which is up 57% so far in May.  While the stock has more than 40% of its float sold short, it is not currently a member of the S&P 1500.  Needless to say, unless the market changes course in the coming weeks, a lot of bearish portfolio managers may find themselves with dwindling assets under management or completely out of a job come Summer.

High Yield Yields Less Than Treasuries Five Years Ago

The chart below is from last week's Bespoke Report newsletter, and it shows the average yield to maturity on the Merrill Lynch High Yield (Junk) Master Index.  At a current level of 5.24%, investors have never been paid less to own high yield debt.  Yields are so low, in fact, that five years ago the yield on the 10-Year US Treasury was higher than the current yield on junk bonds.  In the chart below, the red dots on the blue line represent periods going back to 2000 where the yield on the 10-year US Treasury was higher than the current yield on the High Yield Master Index.  With yields this low, high yield bonds are anything but high yielding.

S&P 500 Sector Breadth Levels

As of this morning, 88% of S&P 500 companies are trading above their 50-day moving averages.  This is a very high reading, but it's not quite as high as the reading we saw back in January.  

Looking at the ten major sectors, the Consumer Discretionary has the highest percentage of stocks above their 50-days at 99%.  Only one more percentage point to go!  Financials ranks a close second at 98%, followed by Consumer Staples (90%), Industrials (87%) and Health Care (87%).  Energy has the lowest reading at 77%, but 77% is obviously not a weak reading.  And while 87% of Utilities stocks are above their 50-days, the reading has been falling instead of rising over the last week or so.  Utilities are down once again this morning as investors shift out of high dividend paying defensive stocks.

Still Bullish

There were more bulls than bears in our weekly market poll for the second straight week.  As shown below, 53% of respondents said the S&P 500 would be higher one month from now, while 47% said the index would be lower.  This is the first time since mid-January that we've had two weeks in a row of more bulls than bears.  Pretty remarkable given the gains we've seen so far this year.

Recent Asset Class Performance

The "Sell in May" theory has been turned on its head so far this year.  As shown in the left-hand side of our key ETF matrix below, US equities have jumped out of the gate strong over the first eight trading days of May.  The Nasdaq 100 (QQQ) and Smallcap 600 (IJR) have rallied the most with gains of more than 3% already, while the Smallcap 600 Growth ETF (IJT) is up even more at 4.03%.  The rally we've seen to start the month has been led by cyclical sectors like Industrials (XLI) and Consumer Discretionary (XLY).  The weakness in defensive sectors has been notable as well.  The Utilities ETF (XLU) is actually down 3.86% on the month, leaving it up just 14.06% on the year.  XLU had been one of the best performing sectors over the first four months of 2013, but now it has moved down to the middle of the pack.

Internationaly, the gains in stocks have been less robust.  Of the fourteen country ETFs shown, nine are up on the year while five are down, and aside from Japan (EWJ), they're all up less than 10%.  Russia (RSX), France (EWQ) and Germany (EWG) have posted the biggest gains so far in May.

Outside of the equity asset class, there hasn't been much to write home about.  Commodities like gold (GLD) and silver (SLV) remain weak, and while we've seen a small bounce in oil (USO) recently, it's still down for the quarter and up just 2.31% on the year.  Treasuries have sold off pretty sharply this month, with TLT down 3.46%.  Fixed income ETFs in our matrix are pretty much red across the board.

S&P 500 Higher or Lower From Here?

Nothing has been able to stop this market lately, but who knows what's in store for investors as we enter the summer months.  What do you think?  Please take part in our weekly Bespoke Market Poll below by answering whether you think the S&P 500 will be higher or lower one month from now.  We'll report back with the results on Monday before the open.  Thanks for participating and have a great weekend!

Will the S&P 500 be higher or lower than its current level one month from now?
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Updated Q1 Earnings Season EPS and Revenue Beat Rates

About 500 companies reported earnings this week, pushing the total number of companies that have reported this season up to more than 2,100.  And while the market is up on the week, earnings haven't been great.  At the start of the week, the percentage of companies that had beaten earnings estimates this season stood above 59%.  The additional 500+ companies that reported this week only beat earnings at a 52% rate, pushing the overall earnings beat rate down to 57.6%.   As shown below, this would be the weakest reading of the entire bull market if earnings season ended today.  The remaining companies set to report before the season ends next Thursday have a lot to live up to!

While the earnings beat rate ticked down quite a bit this week, the revenue beat rate pretty much remained the same.  Last week the revenue beat rate for the entire earnings season stood at 51.7%, and as shown below, it currently stands at 51.6%.  

Head over to our new and improved Bespoke Premium website to view all of our in-depth earnings season analysis.  For the month of May, we're offering a 10% discount on all membership to celebrate our six-year anniversary!

Guidance Spread Negative But Inching Higher

More than 2,000 companies have reported earnings so far this season, which ends next Thursday when Wal-Mart (WMT) reports.  So far this season, the spread between the percentage of companies raising guidance minus those lowering guidance has been -2.9 percentage points.  This means that more companies have lowered guidance than raised guidance, and if it holds in negative territory, it will be the seventh straight quarter with a negative guidance spread.  As shown in the chart below, the spread this season is much better than it was in the prior three quarters.  If we hear positive things from companies next week before earnings season ends, the spread could get a little better even.  That being said, it's pretty amazing that companies have had a negative slant regarding the future for nearly two years now, and over this time period the market has soared.  What would the market be doing if companies were actually optimistic?  Who knows with so much attention paid to Bernanke and his easy money policy.

Dow Trading Range Screen

Below is an updated look at our trading range screen run on the 30 stocks in the Dow Jones Industrial Average.  A description of how to read the chart is shown at the bottom of the screen.

Last week at this time, 13 stocks in the Dow were in overbought territory, but as we enter the final day of this trading week, there are 18 Dow stocks that are overbought.  No Dow stocks are oversold, and only six are below their 50-day moving averages (CSCO, GE, HPQ, IBM, MCD, PFE).  

The most overbought stock in the Dow is 3M (MMM) at more than three standard deviations above its 50-day.  MMM rarely gets up to these levels, and it's now up 18% year to date.  Other Dow stocks that are very extended right now are Chevron (CVX), DuPont (DD), Disney (DIS) and Home Depot (HD).  

Heading into this week, there were still a few Dow stocks that were down on the year, but as of this morning, every single name in the index is up in 2013.

Short Stocks Soar

Today has been a painful day if you are a short seller.  Shares of Green Mountain Coffee (GMCR) and Tesla (TSLA) both had more than 25% of their free-floating shares sold short as of 4/15, and both are trading up more than 20% today.  These are not just two isolated instances either.  Taking a broader look at the overall market shows that stocks with high short interest have been fueling the recent rally.

In the chart below, we have broken out the S&P 1500 into deciles based on each stock's most recent (4/15) short interest as a percentage of float.  We then calculated the average return of the stocks in each decile.  Since April 15th, the average stock in the S&P 1500 is up 6.6%, but only three deciles have above average returns.   What these three deciles have in common is that they are also the three deciles containing the most heavily shorted stocks.  Meanwhile, the two worst performing deciles of stocks since 4/15 are the two that contain the least heavily shorted stocks.  It is not uncommon for heavily shorted stocks to outperform when the market is in rally mode, but over the last month the short side has been especially painful.

High Yield, Preferreds Soar

As stocks continue to rally, two other asset classes that have been doing very well lately are junk bonds and preferreds.  Below are six-month price charts of the high yield (junk) bond ETF (HYG) and the preferred stock ETF (PFF).  As shown, both have basically gone parabolic over the last few weeks, making new 52-week highs on a daily basis.

While high yield bonds and preferreds have been on big runs higher for quite a while now, it may surprise some to know that they're still well below their highs from before the financial crisis.  Below are long-term charts of both HYG and PFF since the two ETFs were created back in 2007.  As shown, HYG needs to gain another 10% to get back to its pre-financial crisis high, while PFF needs to gain another 23%.

Jobless Claims Fall to Lowest Level Since January 2008

Jobless claims came in lower than expected this week (323K vs. 335K) and fell to another post-recession low in the process.  This represents the lowest level since 1/18/08.  For the last several weeks, we have been highlighting the fact that jobless claims have been the one bright spot among the weaker than expected economic data recently, and with claims being one of the only indicators issued this week, the bulls are happy.  Continue reading.

Bullish Sentiment Rises For Fourth Straight Week

It seems that higher stock prices are finally starting to have an impact on the sentiment of investors, and we stress the word starting.  After bottoming out at its second lowest reading of the entire bull market in early April, bullish sentiment as measured by the American Association of Individual Investors' weekly poll rose for its fourth straight week.  This week's reading of 40.79% represents an increase of 9.8 percentage points from last week and is the highest reading since March 14th.  Even after the increases, however, we would note that this week's reading is only 2.5 percentage points higher than the average of 30.3% we have seen during the entire bull market dating back to March 2009.