Option Expiration Week

While we typically expect the market to be quiet ahead of the Christmas holiday, this Friday's expiration should make this week a bit more volatile than normal.  Below we have updated the market's performance during option expiration weeks since 2006. 

As shown, Mondays are typically the most negative with an average decline of 11 bps and positive returns only 48% of the time.  While Tuesday has the overall best return, it is also the most volatile with a change of 1% (up or down) in 11 out of 23 (48%) option expiration weeks.  While Wednesday's average return is slightly less than Tuesday's, it is much more consistent.  Since the start of '06, Wednesday's during option expiration week have been up 74% of the time for an average gain of 0.21%.

Market Declines During Fed Weeks

The S&P 500 was down 2.44% last week, which was the 8th largest decline during a week when the Fed met since 1990.  Below we highlight all Fed weeks in which the index was down at least 2% and provide the S&P's performance over the following week and month.  As shown, the index has been down in the following week 5 out of 9 times for a median decline of 0.75%.  The results get better over the next month, with gains 6 out of 9 times and a median change of 2.91%.  The last time we had a 2% decline during a Fed week was in May 2006, and the index was down 1.87% over the next week and 3.02% over the next month.

UNA PAROLA SOLA: INFLAZIONE!

Following Tuesday's 25 basis point cut in the Fed Funds rate, most investors were disappointed that the Fed did not cut enough.  However, the releases of November's PPI and CPI show that the Fed probably had an early peek to these numbers and decided that they could not cut 50 basis points in the face of such elevated inflation levels.

Thursday's PPI showed that year/year producer prices rose by 7.2%, which was the largest gain since 1981.  Today's CPI, while high, was not nearly as elevated.  On a year/year basis, consumer prices rose 4.3%, which was the highest reading since June 2006.

 

The biggest question on the inflation front now concerns whether the high levels of producer prices will work their way into higher consumer prices.  One line of thinking argues that if producers are experiencing higher prices, it's only a matter of time before they start raising prices.  However, if we overlay the historical PPI and CPI on top of each other, we see that instead of spikes in CPI following spikes in the PPI, they usually both rise and fall in tandem with each other.

Country P/E Ratios and GDP Growth

We recently gathered the current P/E ratios and year-over-year GDP growth numbers for 22 countries that have trackable ETFs.  For P/E ratios we used each country's major equity market index.  We then calculated the PEG ratio for the country as a whole by dividing the P/E ratio by the GDP growth.  As shown below, Singapore currently has the lowest PEG (P/E/GDP) at 1.43, with a P/E of 12.69 and GDP of 8.90%.  Singapore is followed by Russia, Malaysia and South Africa.  At the bottom of the list with the highest country PEG ratios are the US, Italy and Japan.  The S&P 500 has a P/E ratio of 18.39 and GDP growth of just 2.8%.  The country with the lowest P/E ratio is Sweden, but its GDP growth is 2.6%, so it is right in the middle of the pack as far as PEGs go.  The country with the highest P/E by far is China, but its strong GDP growth gives it a PEG of 3.96.

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Russell 1,000 Winning and Losing Streaks

Below we highlight the stocks in the Russell 1,000 with the longest winning and losing streaks.  CTCM leads the list of winners, up 10 days in a row, followed by CLR (8 up days), RESP (7) and RMD (7).  CTCM hasn't been up 10 days in a row any other times in the past 5 years.  CLR has been up 8 days in a row one other time, and on the 9th day it went down 1.65%.  RESP and RMD have only gone up a third of the time on day 8 after being up 7 days in a row.  On the losers list, FMD leads the way at 9 consecutive down days.  The one stock that looks pretty good on the down list is DGX.  It has been down 6 days in a row 10 times in the past 5 years, and it has gone up on the 7th day 8 times for an average gain of 0.77%.

 

This information is available daily in our Stock Odds report available to Bespoke Premium subscribers.

Recession Odds Stable at 45%

Even though many have said that the 25 basis point cut by the Fed this week increased the odds of a recession because it was not enough, prediction markets have indicated that odds remain the same.  Currently, the Intrade contract is putting the odds of a recession (2 consecutive quarters of negative GDP growth) in 2008 at 45.5%.  As shown in the historical chart below, the odds have actually been trending slightly lower since mid-November.

Sector Relative Strength

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 the S&P 500 over the last year.  Finally, in each chart we have also included red dots which indicate the four Fed rate cuts since August.

Of the ten sectors, only two (Consumer Discretionary and Financials) have underperformed in the last year, and neither of these sectors have seen any noticeable benefit from the four Fed rate cuts.  Interestingly, the three sectors which have been the most positively impacted are Consumer Staples, Health Care, and Utilities, which are all defensive in nature.  While it's probably too early to see if the most recent cut in rates has had any meaningful impact, the energy sector appears to have broken out of its recent congestion following Tuesday's cut.

   

Recession What, Bear Market Who?

We recently did a word search of the New York Times for the words "bear market" and "recession" on a yearly basis going back to 1960.  Our thoughts were that the terms have been working their way more and more into newspapers and magazines this year, but our findings suggest otherwise.  The past three years have seen some of the lowest mentions of both "bear market" and "recession" over the past 50 years.  The charts below highlight the number of articles mentioning the terms on a yearly basis.  The red bars indicate years in which an actual recession or bear market actually took place.  Just because the number of mentions of these terms is low doesn't mean that either events are imminent, but it also doesn't mean we're in the clear.

 

"The List" -- These Stocks Have Had Enhanced Performance During the Current Bull Market

The mainstream media story of the day and possibly the sports story of the year is the Mitchell Report on steroid use in baseball expected to be released this afternoon (although the list of player names is already circulating).  We decided to create our own list of the stocks that could possibly have been on steroids since the bull market began in October 2002 because of their amazing performance.  Below we highlight the 50 stocks currently in the Russell 3,000 that are up the most since then.  As shown, SWIM is up 26,515%, followed by SBAC (14,429%), PRXI (9,650%) and HANS (9,619%).  If we only had a crystal ball.

It Looked Good For a Little While

Just like Bank of America's (BAC) investment in Countrywide (CFC) back in August, the $7.5 bln cash infusion by Abu Dhabi into Citigroup (C) looked good for awhile, but has quickly taken a turn for the worse.  As shown below, Citigroup's stock is back to where it was on the date the deal was announced.

Stronger Than Expected PPI Reports

This morning's higher than expected PPI represented the largest margin of error to the upside in at least ten years.  While expectations called for a gain of 1.5%, the actual number came in at 3.2%.  Below we highlight the largest upside surprises to PPI and highlight the one-day % return of the S&P 500 and its ten sectors.

Bespoke's Sector Snapshot

Below we highlight our trading range charts for the S&P 500 and its ten sectors.  The light blue shading represents one standard deviation above and below the sector's 50-day moving average (white line).  The top of the red shading and the bottom of the green shading represent two standard deviations above and below the sector's 50-day.  When the price hits either the red or the green zone, it becomes either overbought or oversold.  When the price moves above or below these levels, extreme overbought/oversold readings are reached, and short-term opportunities arise.  Currently, the S&P 500 is trading in the neutral zone after bouncing nicely off of oversold levels at the end of November.  As we have stated in the past, we are currently in a trading market instead of a trending market, so it's important to take profits at overbought levels and look for buy opportunities at oversold levels.

On a sector basis, none are currently oversold, although it might seem like it after the past couple of days in the market.  Financials are the closest to oversold levels, but if the past few months are any guide, the sector can get a lot more oversold.  With AT&T's rally over the past couple of days, the Telecom sector has finally moved off of oversold levels and closed above its 50-day moving average.  On the overbought side, Consumer Staples are at extreme levels, while Health Care and Utilities are in the red zone.

These charts, along with a number of other indicators, are part of our weekly Sector Snapshot available to Bespoke Premium subscribers.

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Nasdaq 100 Short Interest

The Nasdaq recently released its month-end November short interest data, and below we highlight the 25 stocks in the Nasdaq 100 with the highest and lowest short interest as a percentage of equity float.  As shown, Sears Holdings (SHLD) has by far the highest short interest at 25% of float.  SHLD is followed by AMLN, CEPH, WFMI, UAUA, BIDU, LVLT and LAMR.  While the Nasdaq 100 is typically associated with Tech, not many Tech names appear on the list of highly shorted stocks.

However, the list of stocks with the lowest short interest as a percentage of float is made up of a lot of Technology names.  ERIC, CSCO, RYAAY, ORCL, INTC, INFY and MICC are the least shorted stocks in the index.

Click here to download an Excel spreadsheet that includes short interest for the entire Nasdaq 100.

Dow 30: Taking Stock

Year end is fast approaching, and it's important to know which stocks in the Dow have been leading or dragging down the index over the past twelve months.  Which stock in the Dow is up the most YTD and which is down the most?  The stock that is down the most shouldn't be too tough of a guess, but you may be surprised by the stock that's in the lead.

Highlight the white space below to see how close you were.

Stock	YTD % Chg
MCD	39.09
MRK	36.97
INTC	34.72
KO	32.17
HON	27.63
HPQ	25.10
AA	22.89
UTX	22.81
VZ	20.68
MO	20.65
CAT	20.37
XOM	19.95
T	16.67
PG	16.18
MSFT	15.44
IBM	11.65
MMM	11.20
WMT	4.44
JNJ	2.55
GE	0.11
BA	-2.16
JPM	-4.45
DIS	-4.54
DD	-5.87
PFE	-8.07
AXP	-10.86
GM	-10.94
AIG	-18.77
HD	-29.06
C	-43.50

Financials Struggle

Below we highlight the 20 worst and 20 best performing stocks in the S&P 500 since the market close prior to the Fed Day on Tuesday.  As shown below, the 20 worst list contains 15 Financial stocks, led by WM (down 19%), MTG (-19%), SLM (-18.5%) and CFC (-15.75%).  Fed - Keep Trying!

The list of best performers is led by AT&T (T), JNPR, HES, X and CSCO.  Not one Financial or Consumer Discretionary stock is represented.

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