Following yesterday's Fed announcement, the S&P 500 rapidly fell through both its 50 and 200-day moving averages. Interestingly, this is only the 21st time the index has fallen through both moving averages on the same day. Below we highlight the S&P 500 return following each of the prior occurrences. As the results illustrate, while the one day and one week returns are modestly positive, over the next two weeks and one month, returns have been negative.
Bloomberg recently published their December survey of 63 economists for a number of economic indicators. Below we have charted the median forecasts from this survey of GDP, CPI, the Fed Funds Rate and the 10-Year Treasury yield. As shown, GDP is expected to bottom this quarter and gain 1.5%, 2.1%, 2.5% and 2.7% in the four quarters of 2008. CPI is expected to top out this quarter at 3.8% and then decline to 3.2%, 2.5%, 2.6% and 2.3% by Q4 '08. The Fed Funds Rate is expected to decline to 4.0% in the first quarter of 2008 and remain at that level for the remainder of the year. From this forecast, economists expect just one more rate cut in the current easing cycle (at least through 2008). The yield on the 10-Year Treasury is expected to bottom in the first quarter and then rise to 4.5% by the end of next year.
On the outset, these numbers look pretty good, as the worst seems to be over for the economy (GDP up, CPI down), however, when we look at their forecasts for Q1 '08 from past surveys, we see that expectations have steadily weakened. Back in February of this year, expectations for the first quarter of 2008 were much more rosy.
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With the S&P 500 up about 7% so far this year, most investors are probably satisfied with the gains, especially given the events transpiring in the market. However, after adjusting for currency changes, the S&P 500 is underperforming most of its international peers yet again this year. The only countries that are currently doing worse than the S&P 500 are Italy, Sweden, Switzerland, and Japan (which is actually down in dollar terms). If the current trend continues, 2007 will mark the sixth year in a row where the US underperformed the MSCI World Index.
As year end approaches, more and more strategists are coming out with their 2008 forecasts, and below we have updated our table of these predictions. As shown, all 9 of the firms that have provided estimates are expecting the S&P 500 to move higher in 2008. JP Morgan and Wachovia currently have the lowest S&P 500 projections at 1,590 (4.98% from here). Lehman and Banc of America are looking for roughly 7% gains, while Goldman and Citi have price targets of 1,675 (10.59%). Strategas is looking for 1,680, and Bear Stearns and HSBC have the highest estimates at 1,700. Of these 9 firms, Bear, Goldman and Wachovia did the best on their 2007 S&P 500 projections, with price targets just 2.34% above the current level.
Below we highlight the results of our Fed polls going into today's meeting. As shown, while it's not a majority, 34% of respondents want the Fed to cut by 50 basis points tomorrow -- more than any of the other choices. The second highest response was for the Fed to leave rates the same at 28%, followed by 25% who want a cut of 25 bps.
When asked what they think the Fed will do, the results become much more clear. Sixty-three percent think the Fed will cut by 25 bps, followed by 31% who think they will cut by half a percent.
These results indicate that investors think that either the economy is worse than the Fed thinks it is, or the market really needs a cut of 50 basis points. This sentiment is different than the results from our poll prior to the last FOMC meeting, when the number one response to the 'want' question was to leave rates the same. Investors seemed to have thought things were better than the Fed did back then, only to have the credit crisis get worse and markets go lower.
So what does this sentiment mean for the market? Since the top 'want' response is for the Fed to cut 50 bps, a 25 basis point cut could mean that investors will think the Fed has more confidence in the economy than they do, sending markets higher. A 50 basis point cut could mean the Fed thinks the economy is just as bad as investors think it is, sending markets lower. When the Fed cut more than investors wanted them to last time, the markets went higher initially, only to have their first 10% correction since 2003.
But if investors want the 50 basis point cut because they think the market has to have it, than anything short of that will be detrimental to stocks.
To clear things up, we want to know what our readers think these results mean. Please let us know in the comments section if you have any thoughts. If you have yet to take part in the poll, you can do so below.
The Russell 1,000 is down 0.91% since the close prior to the last FOMC meeting on October 31st, and 46% of stocks in the index are up since then. Below we highlight the 25 stocks in the index that have performed the best since then and the 25 that have performed the worst. As shown below, WCG is up the most at 105% since the last Fed meeting, gaining back quite a bit of what it lost after the legal probe of the company was announced. WCG is followed by THC (+68.56%), FSLR (66.94%), MTG (56.44%) and MA (37.10%). While investors were hoping that the rate cut on the 31st would help the beleaguered Financials and Consumer Discretionary sectors, just 2 Financials are on the best performing list and no Consumer Discretionary stocks are represented.
Financials and Consumer Discretionary stocks are well represented on the worst performing list however. As shown below, ETrade is down the most at -59.78%, followed by FMD, PAY, IMB, LEAP and CROX. Other notables on the list are FNM, FRE, AMD, WM and WYNN. Let's hope these names can perform better from now until the January 30th meeting.
Investors have read everywhere that third quarter earnings growth for the S&P 500 was negative. But not too much attention has been paid to revenue growth. Below we highlight both earnings and sales growth for the S&P 500 and its 10 major sectors in the third quarter. While three sectors (Financials, Consumer Discretionary and Energy) had negative year over year earnings growth in Q3, none of them had negative year over year revenue growth. While the Consumer Staples sector ranked 6th out of 10 for earnings growth, it ranked second for revenue growth behind Telecom. Technology ranked 3rd with an 11.3% increase in sales, followed by Industrials, Materials and Health Care. Overall, the S&P 500 saw year over year earnings decline by 2.5% from Q3 '06, but its revenues grew by 7.4%.
For traders with a more short term time horizon, we have compiled a list of the S&P 1500 stocks which have the largest intraday high/low ranges (based on the average percent spread between the intraday high and low for the last fifty days). We then grouped the stocks based on whether they have a rising or falling 50-day moving average. Tickers highlighted in gray are new to the list since last month's screen. As this month's screen highlights, the list is dominated by stocks in the housing sector, and while some of these names have had strong gains in the last couple of weeks, the rallies aren't enough to reverse their longer term downtrends. Currently, LaBranche (LAB) is the only stock on the list with a rising 50-day moving average.
In our weekly Sector Snapshot available to Bespoke Premium subscribers, one of the indicators we analyze is the percentage of stocks above and below their 50-day moving averages. This data is a good breadth indicator that highlights underlying strength of an index or sector. As shown in the first chart below, currently 52% of stocks in the S&P 500 are above their 50-day moving averages. This means market internals for the index as a whole have moved back to the plus side. Another positive is that the indicator made a "higher low" during the most recent market correction versus the August declines.
On a sector basis, Utilities currently have the most stocks above their 50-day moving averages (94%). Industrials and Consumer Staples also have positive market internals, with 71% and 74% of stocks above their 50-days respectively. One surprising note is that the Technology sector only has 31% of stocks above their 50-days. This is lower than the struggling Consumer Discretionary sector and the Financials, which is a negative for Tech.
Respondents to the Bespoke Market Poll turned bullish for the first time since the end of October, as the S&P 500 moved back above its 50-day moving average last week. When asked for their current view on the S&P 500, 51% of participants marked "Bullish" while 49% marked "Bearish." With the FOMC meeting headlining the news this week, what is in store for equities going forward? Please let us know by taking part in the Bespoke Market Poll below.
From the most recent Bloomberg survey of commodities analysts, we calculated the forecasted percent change from the current price to the median expected year-end 2008 price target of 13 commodities. As shown below, 8 commodities are expected to decline in price, while 5 are expected to rise. Zinc is expected to see the biggest price gain at 13.6%, followed by Aluminum (9.5%), Natural Gas (6.6%), Sugar (6.2%) and Cotton (2.6%). Wheat is expected to be down the most at -27.4% (go bread! go beer!). The two most followed commodities -- Gold and Oil -- are also expected to be down in 2008. Oil is expected to fall 18.5% to $72.50, while Gold is expected to fall 4.7% to $765.
We've moved this post from yesterday to the top of the site for readers that have yet to participate in our Fed polls.
As we have done for the past two FOMC meetings, we want to know once again what Bespoke readers want the Fed to do when they meet on December 11th and what they think the Fed will do. Please let us know by taking part in the two polls below. We'll run the polls through the meeting date next Tuesday and update the results periodically until then.
Since the Russell 1,000 bottomed on November 26th, the average stock in the index is up 7.29%. We broke the index into deciles (10 groups of 100 stocks) based on their performance during the market's correction from 10/9 to 11/26 to see how stocks that performed the best and worst during the declines are performing during the current rally. As shown in the chart below, the results are pretty clear. The decile of the worst performing stocks during the correction is up the most during the rally, with an average performance of 11.24%. The second worst decile is up the second most, the third worst decile is up the third most, and so on and so on. Investors have clearly been doing some bottom fishing throughout the rally.
Below we highlight the 20 best performing stocks in the Russell 1,000 since the 11/26 bottom. As shown, FRE is up the most at 51%, but it was down 61% from 10/9 to 11/26. Only two stocks on the best performing list were up during the correction -- THC and MOS. Other notables on the list below are CFC (up 40%), FNM (up 34%) and homebuilders CTX, RYL, DHI, TOL, LEN, NVR and PHM.