Cumulative Upside NYSE Volume

While market breadth is typically measured by looking at the number of stocks that are up on the day versus those that are down, another way to look at it is by looking at the net daily upside volume (daily volume in stocks that are up minus daily volume in stocks that are down on the day).  In the chart below we compare the cumulative net upside volume in NYSE stocks versus the S&P 500 since 2002.

Since the S&P 500 bottomed in 2002 through this past Summer, every time the S&P 500 hit a new high, cumulative breadth also made a new high.  Since then, we have seen two negative divergences in this indicator.  When the S&P 500 peaked in October, the cumulative breadth failed to confirm the new high.  More recently, while the S&P 500 failed to make a new closing low in November, upside volume did break below the Summer lows.  Going forward, investors may want to pay closer attention to volume statistics, especially on days where the market has a large move to the upside or downside.

More of the Same

Equity markets got off to a poor start to 2008, with the Dow 30 falling 1.67% on the day.  Quite a few stocks fell significantly and already have to work out of a big hole if they want to see gains in '08.  Below we highlight the 25 stocks in the Russell 3,000 that had the biggest declines on the day.  As shown, NCMI fell 17.22%, followed by CLAY (-15.5%), PAY (-14.8%) and CITP (-14.6%).

 

We also looked to see if the same stocks that fell last year followed through to the first day of 2008.  We broke the Russell 3,000 stocks into deciles (each decile represents 10% of the index) by their 2007 percentage change and calculated the average percent change of each decile today.  As shown below, the decile of the top performing stocks in 2007 held up the best today, while the two deciles of the worst performing stocks in 2007 led the declines.  It looks like today was a continuation of the negativity that ended 2007.

   

Hoping for a Triple Top

Crude touched $100 per barrel today for the first time ever.  There is no doubt psychological resistance at the $100 level, as the commodity got very near it twice in November as well.  This is one of the few times where most investors are actually hoping for a triple top to occur.

ISM Manufacturing Turns Negative

Not only was the headline number of this morning's ISM report negative, but the internals also showed significant weakness.  Of the six components of the report that go back to at least 1970, three of them went from expansive (above 50) to contractionary (below 50) in December.  Going back to 1970, on a monthly basis, we calculated the number of components of the index that went from above to below 50 and plotted them in the chart below.

Since 1970, December marked only the fifth time that this many categories of the ISM turned negative during the same month.  While this would now seem to imply that calling for a recession is merely a formality, the chart shows that of the four prior occurrences, a recession started within the following six months only twice.

A Sign of Bad Things to Come? Not Really

If the Dow 30 were to close at current levels, it would be the biggest one-day decline to start the year since 1983 when the index lost 1.86%.  Going back to 1945, today's declines are the second worst behind 1983 at -1.74%.  But do bad starts to the year indicate more declines over the next 364 days?  No.  Of the ten times that the Dow has closed down 1% or more on the first trading day of the year, the index has averaged a gain of 10.26% for the entire year, with up years 60% of the time.  These average gains are better than the average one-year change of 8.47% for all years since 1945.  It would still have been nicer if the index closed up more than 1%.  When that happens, the Dow has averaged a full-year gain of 12.81%.

Wondering how to invest in 2008?  Read our 90-page 2008 outlook, The Bespoke Report, by becoming a Bespoke Premium member today.

ISM Commodities Survey

With inflation on every investor's radar following last month's stronger than expected PPI and CPI reports, any read on prices will receive added scrutiny.  One less widely followed indicator is the ISM Commodities Survey which is released within each month's ISM report.  As the chart below illustrates, the indicator has generally had a pretty good record at anticipating moves in the CPI.

This month's commodity survey showed that 15 commodities were up in price for the month, which is the highest monthly reading since May 2006 and the third straight monthly gain.

 

AMZN Upgraded, SBUX Downgraded

SBUX was downgraded at Bear Stearns this morning from Outperform to Peer Perform, while AMZN was upgraded at Citigroup from Hold to Buy.  Below we highlight the historical recommendations of SBUX from Bear and of AMZN from Citigroup.  As shown, the Bear analyst has had an Outperform rating on SBUX since May 2005, while the Citigroup analyst has never had a Buy rating on AMZN, even as the stock has gone from $30 to nearly $100.  From the perspective of the charts, today's recommendations don't look like the best timed calls.

 

What Bull Market?

One of the biggest questions heading into 2008 is whether or not the global equity rally can keep going for a sixth straight year.  Implied in this statement is that 2007 was the fifth year of a global bull market.  However, a look at the returns of major international indices in any currency but the dollar shows that 2007 was not really such a great year.  Below we highlight the 2007 returns of major international equity indices, in terms of Euros.  Of the 12 indices we listed, only five had double digit returns in 2007, and four finished 2007 down for the year, including the US which was the second worst performer behind Italy. 

 

The Anti-Rolaids List: 2007

Over the weekend, we highlighted our Rolaids List for 2007.  These are the stocks that caused frequent heartburn for investors as they had the most one-day declines of 5% or more.  Today, we took the opposite approach and screened for the S&P 1500 stocks that had the most single day gains of 5% or more.  This year, Fremont General (FMT) tops the list with thirty-nine 5% up days.  But even with all these big up days, the stock is still down over 75% on the year, as it also had 54 days where it was down 5% or more.  In fact, FMT topped the list of stocks with the most 5% down days and the most 5% up days!  Of the 17 stocks in the list below, nine of them also made our Rolaids List (shaded tickers).

Volatility? What Volatility?

While most would agree that the stock market has certainly been more volatile this year, putting it in perspective with the long term trend shows that by at least one measure, the S&P 500 was less volatile this year than its long term average.

The chart below summarizes the average absolute daily price change in the S&P 500 by year.  In 2007, the average worked out to 72 basis points, which means that, on average, the S&P 500 had a daily move (up or down) of 0.72% versus an average of 0.75% since 1928.  While this year was more volatile than the last three years, prior to those years, the last time the market was this 'placid' was in 1996.

Sector Relative Strength

As the year winds down, now is as good a time as any to review how each of the market's sectors are performing versus the overall S&P 500.  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 over the last year.  Finally, in each chart we have also included red dots which indicate the four Fed rate cuts since August.

With the S&P 500 up less than 4%, 2007 is shaping up to be a below average year of market returns, but as the charts illustrate, the weakness has been contained to just two sectors - Consumer Discretionary and Financials.  Without the negative drag from those two sectors, the S&P 500 would have gained about 17% this year.

Looking at each of the ten individual sectors, we found that some notable changes have developed in recent weeks.  While Consumer Discretionary and Financials have seen zero benefit from the Fed rate cuts and remain in sharp downtrends, some of the more defensive sectors, which had continued to outperform, have all shown signs of weakness versus the market over the last two weeks.  While this may merely be profit taking following sharp rallies, it may also be an early signal that investors are beginning to increase their willingness to take risk.

   

The Rolaids List: 2007

Nothing gives an investor more heartburn than when a stock they own in their portfolio has a large down day.  With that in mind, we compiled a list of current S&P 1500 stocks that had the most one-day drops of 5% or more in 2007.  As the list below highlights, 22 stocks had more than 20 5% down days.  FMT topped this year's list with 54 days of 5% declines or more.  That works out to more than one per week!

While most of the stocks in the list were down big on the year, one name on the list, Champion Enterprises (CHB), had 22 'big' down days and still managed to finish the year up.

How the Best and Worst of '06 Fared in '07

As lists of the best and worst performing stocks of 2007 show up everywhere, we decided to see how the winners and losers of 2006 performed this year.  Below we highlight the 25 best and worst performing stocks in the Russell 1,000 in 2006 and provide their year to date performance in 2007 as well.  As shown, the 25 best performers of 2006 are up an average of 7% this year, although 9 of the 25 are actually down more than 25% on the year.

The 25 worst performing stocks of 2006 are down an average of 12% this year.  CHS, BZH, JBL, AMD, NNI, OCR, BSX and KBH are down even more this year than they were last year.  Clearly, anyone who looked for turnaround plays at the start of this year had a tough go at it. 

Below we highlight the 25 best and worst performers in the Russell 1,000 in 2007.  Compared to last year, the gains and losses have been much more magnified.  The biggest winner last year was up 196%, while this year, FSLR is up 791%.  The biggest loser in the index last year was down 52%, while every single stock in the bottom 25 this year is down more than that.  This year has definitely been a stock picker's market, with a large divergence between winners and losers.

    

A Case for Closing the Markets on Monday

The last trading day of the year has not been a good one over the last 25 years.  Since 1982, the Dow has averaged a decline of 25 bps on the final trading day of the year, going up just 36% of the time.  Over the past 10 years, the numbers are even worse.  Since 1987, the Dow has gone up just 30% of the time for an average decline of 33 bps.  Even more of a reason to close the markets on Monday!

Yale University's 2007 Endowment Report

Regular readers of Bespoke know that we are big fans of David Swensen and the Yale Endowment.  Mr. Swensen's book on personal investment is a must read, as it teaches investors about the importance of asset allocation and portfolio rebalancing.  Bespoke even offers an all-ETF money management strategy that practices much of what Mr. Swensen preaches in the book.

Recently, Yale released its Endowment Update for 2007.  The report can be read by clicking here.  We also compared the endowment's current portfolio to that of previous years, and we highlight a chart and table of it below.  As shown, there were no significant changes in the allocation of asset classes from 2006 to 2007.  Private Equity was the only real increase from 16.4% to 18.7%.  When comparing the current portfolio to 2002, however, we see that Domestic Equity has fallen from 15.4% to 11%, Fixed Income has fallen from 10% to 4%, and Private Equity and Real Assets (real estate, timber land, oil and gas) have increased.