Monday
Mar242008

Sector Relative Strength

After a week like last week, it's often a good idea to look at how the different sectors of the market stack up against each other.  Below we have updated our charts highlighting sector relative strength over the last year.  In each chart, rising lines indicate periods where the sector is outperforming the S&P 500, while red shaded charts indicate that the sector has underperformed over the last year.  Finally, in each chart we have also included red dots that indicate each of the Fed rate cuts since August.

Over the last year, four of the ten sectors are currently underperforming the S&P 500.  While it comes as little surprise that the Consumer Discretionary and Financial sectors have lagged the market, defensive sectors such as Health Care and Telecom Services are also underperforming, which is puzzling given the current economic backdrop.  Following last week's sell off in commodities, the Energy and Materials sectors are approaching key support levels.  If these trends do not hold, the multi-year uptrend in both sectors will be at risk.

Relative_strength_032108a

Relative_strength_032108b

Relative_strength_032108c

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Monday
Mar242008

The Decoupling Continues -- In Reverse

Below we highlight the year to date returns of the major equity indices for a number of key countries.  Using prices from this morning, the United States' S&P 500 and Dow 30 are down much less than the rest of the countries analyzed.  China is down 27.7%, India is down 24.6%, Hong Kong is down 24% and Germany is down 21.7%.  Leading up to the peak in global equity markets last year, many people thought that countries were finally strong enough to decouple from the US and perform well even if the US went down the tubes.  These days, however, the US is the one doing the decoupling on the upside.

Equity324 

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Monday
Mar242008

Bear Stearns Soap Opera Continues

An article in today's New York Times reports that JP Morgan (JPM) is in talks to raise its takeover bid for Bear Stearns (BSC) by 500% from $2 to $10 per share.  While one reason cited for the higher bid is the fact that JPM may not want to alienate BSC employees, the more important reason may be related to a 'mistake' in last weekend's contract that was 'inadvertently' left in the agreement. 

According to the New York Times story, "one sentence was 'inadvertently included,' according to a person briefed on the talks, which requires JPMorgan to guarantee Bear’s trades even if shareholders voted down the deal. That provision could allow Bear’s shareholders to seek a higher bid while still forcing JPMorgan to honor its guarantee, these people said."

Imagine that.  With 118 million shares outstanding, if JPM is forced to increase its bid to $10 per share, that would work out to about an extra billion dollars that they would have to pay for BSC.  While Jamie Dimon may be questioning the worth of his lawyer's fees, BSC shareholders must be thinking they are worth every penny.

Sunday
Mar232008

Commodities Sizzling?

While reading the "News You Need to Know" section of this week's BusinessWeek that arrived at our office on Friday, we were reminded of the scene in Dumb and Dumber where Jim Carrey walks out of the bar and sees the headline from an old newspaper that says, "Man Walks on the Moon".

The particular comments that we found to be somewhat 'dated' concerned the action in commodities.  The article reported that "Commodities are sizzling as investors rush away from the declining dollar and rocky equities markets, while emerging markets continue to stoke demand. Gold closed above $1,000 an ounce for the first time on March 17th, while crude oil spiked to $111 per barrel on March 13th."  While gold did in fact close above $1,000 on Monday, the more important and timely news you need to know was that it then proceeded to decline for the rest of the week before closing at a price of $920 for its worst week since 1990.

Saturday
Mar222008

This Week's B.I.G. Tips Reports at Bespoke Premium

Below we provide the titles of the in-depth B.I.G. Tips reports we released this week.  If any spark your interest, they are all available to our Premium subscribers.  These are anticipatory, ahead-of-the-curve research reports that cover markets, economies, stocks, commodities, housing and anything else related to making people money. 

This week's B.I.G. Tips reports: Monthly Economic Indicator Analysis (a look at recent trends in US economic indicators), Options Expiration (typical market performance on options expiration days), Big Days Happen In... (where do +3% days happen in the typical market cycle?), S&P 500 Inflection Point (the key price level to watch on the S&P 500), Large Up Fed Rate Decision Days (market performance following positive reactions to Fed days), International Revenues (a look at how stocks with high international revenue exposure have performed), Visa IPO (a look at the performance of large IPOs historically), Top 40 Technicals (our favorite stocks based on technical analysis), SPY Down Gaps (how the market performs intraday when it gaps down significantly).

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Friday
Mar212008

This Week's B.I.G. Tips Reports at Bespoke Premium

Below we provide the titles and thumbnails of the in-depth B.I.G. Tips reports we released this week.  If any spark your interest, they are all available to our Premium subscribers.  These are anticipatory, ahead-of-the-curve research reports that cover markets, economies, stocks, commodities, housing and anything else related to making people money. 

This week's B.I.G. Tips reports: Monthly Economic Indicator Analysis (a look at recent trends in US economic indicators), Options Expiration (typical market performance on options expiration days), Big Days Happen In... (where do +3% days happen in the typical market cycle?), S&P 500 Inflection Point (the key price level to watch on the S&P 500), Large Up Fed Rate Decision Days (market performance following positive reactions to Fed days), International Revenues (a look at how stocks with high international revenue exposure have performed), Visa IPO (a look at the performance of large IPOs historically), Top 40 Technicals (our favorite stocks based on technical analysis), SPY Down Gaps (how the market performs intraday when it gaps down significantly).

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Econindic Optionexpiration

Bigdays Inflect_2

Large_up_3 Intl

V_ipo Top40

Spydown

Friday
Mar212008

Brokerage Stock Year to Date Performance

After a week that started off with the "Big 5" of brokerage stocks becoming the "Big 4", and the financial system on what many thought to be the brink of collapse, things turned out to be alright (for now).  On the week, Morgan Stanley (MS) was up 25.6%, Lehman (LEH) was up 23.9%, Goldman Sachs (GS) was up 14.5%, and Merrill Lynch (MER) was up 7.7%.

As shown below, the year to date performance of the "Big 4" improved significantly this week.  It's surprising to see that Morgan Stanley (MS) is only down 6.5% year to date.  That's not too bad considering the S&P 500 is down 9.45%.

Brokers

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Thursday
Mar202008

Recent Key ETF Performance

Below we highlight the recent performance of a variety of ETFs that cover all asset classes.  We'll let the performance numbers do the talking.

Etf320

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Thursday
Mar202008

Playing the Scared Masses

The skittishness in shares of banks and brokers has definitely made big bucks for investors betting against the companies lately.  While the credit crisis has locked up the financial system in recent months, LEH, GS and MS managed to report better than expected earnings this week.  When these large cap companies swing up and down 50% in a matter of days, though, company fundamentals are likely taking a back seat.  After Bear Stearns declined 50% last Friday and then another 95% on Monday, anything was on the table, leaving other brokerage companies exposed to worries that they too could easily go under.  In recent weeks, Wall Street has been focusing on the increased options activity in cheap, way out of the money puts.  Traders see this large put volume as a sign that someone is betting on a big collapse in share prices.

Yesterday, Merrill Lynch was under the magnifying glass after rumors of more writedowns surfaced and news reports showed put volume rose significantly.  The stock reacted by falling $5.18 (-11.1%) on the day.  After analyzing the options activity, it shows that it doesn't take too much for a large hedge fund to make a quick buck on this newfound investor anxiety.

Let's say a multi-billion dollar hedge fund decides to heavily short the stock throughout the morning when it's trading relatively flat on the day.  Then they go out and buy a boatload of out of the money puts that are trading at $0.50 to $1.50 (a relatively cheap trade for a very large fund).  Options watchers and financial news outlets see this big put volume and begin to report on it, sending the stock price lower.  By spending a million or so on way out of the money puts (chump change for a big fund), the stock falls $5 on the day and the put option increases significantly in value as well.  The fund would most likely cover the stock and sell the puts by the end of the day, walking away with some hefty gains. 

At the same time, the companies can't really defend their stocks either.  If they come out and say things are OK, and then events change, they will open themselves to litigation.  Another way to defend themsleves would be to announce a buyback.  However, given the cash constraints these companies face, a buyback is out of the question. 

As shown below, yesterday someone did buy a big chunk of April 30 puts at 11 AM for around $1.50.  At that point, the stock was relatively flat on the day at $46.63, so someone could have easily accumulated a large short position throughout the morning.  After the put volume showed up, shares started trading sharply lower.  After a couple of hours, the stock stabilized after dropping 5 points, meaning the fund could have been covering their short and selling the puts.  As long as no one at the fund spread any false rumors about the company, it's a perfectly legal strategy.  We're not naive enough to think that a fund wouldn't call a reporter to talk about the heavy put volume though.  In times like these, you can bet that the smart money is profiting off investor fear.   

Merintraday_2

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Thursday
Mar202008

One and Two Percent Days Becoming the Norm

A whopping 44 of the last 90 trading days have been moves of 1% (+/-) or more in the S&P 500.  Fifteen of the last 90 trading days have been 2% days.  Below we provide a historical rolling 90-day sum of 1% and 2% days in the index.  While we've been constantly reading and hearing that the current period of volatility is unlike anything ever seen before, it isn't.  As shown, the number of 1% days reached 64 out of 90 back in October 2002, 56 out of 90 back in 1988, and 54 out of 90 back in 1974.  And the 15 out of 90 that have been 2% days are nowhere near the highs reached during those periods either.  The reason why so many people are so frantic about volatility is because it was extremely low preceding the current period.  As shown, it was rare to see a 1% day from about 2004 to 2007, and 2% days were non-existent.   

12days_2 

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Thursday
Mar202008

S&P 500 and Dow 30 Stock Performance Year to Date

Dow30320_3Wal-Mart (WMT) shareholders are filled with joy these days to finally see the stock not follow the company's "Always Low Prices" slogan anymore.  As shown in the chart below, today it broke to new highs after trading in a range between $40 and $50 for years now.  The stock is also the best performing member of the Dow 30 year to date, up 10% so far in 2008.  At right we highlight the year to date performance of the 30 Dow stocks.  As shown, just 6 of the 30 are up on the year.  Along with Wal-Mart, IBM, DD, HD, CAT and JPM are in the black in 2008, while the rest are in the red.  C, MRK, AIG, GM and VZ are down the most.

Wmt

Below we highlight the best and worst performing stocks in the S&P 500 year to date.  We also include their performance since the short-term bottom reached on 3/10.  As shown, Big Lots (BIG) is up the most at 33.58%.  In prior years, the top performing stock was already up 100% or so by now.  It's good to see some homebuilders on the list (PHM, DHI, KBH), because positive performance from this group is likely to precede a turnaround in the real estate market.  Other notables on the list of best performers include EOG, ZMH, DRI, YHOO, HOT and NUE. 

Best320

Bear Stearns (BSC) remains in the S&P 500, so it tops the list of losers at -93.47%.  BSC is followed by ABK, CIT, S, TIE and WLP.  So far this year, 100 stocks in the S&P 500 are up, while 400 are down.  It hasn't been pretty.   

Worst320

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Thursday
Mar202008

Bespoke's Sector Snapshot

Below we highlight our trading range charts of the S&P 500 and its ten sectors.  The white line is the sector's 50-day moving average.  The light blue shading represents one standard deviation above and below the sector's 50-day, and the red and green shading represents 2 standard deviations above and below.  Going into the long weekend, most sectors remain in downtrends.  Financials, Health Care, Consumer Discretionary and Technology are in the steepest downtrends.  The two sectors that had been holding up the best -- Energy and Materials -- are starting to break to the downside with commodities struggling.  Consumer Staples and Industrials look the best here (if you can call it that).

Spxte

Finlindu

Inftenrs

Consdisc

Hlthmatr

Utiltels      
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Thursday
Mar202008

Bespoke's Commodity Snapshot

With commodities down sharply once again today, and the news media already asking everyone and their mother's if this is the end of the boom, below we highlight our trading range charts of major commodities.  The green shading represents two standard deviations above and below the commodity's 50-day moving average.  When the price moves above the green shading, it is considered overbought (oversold when below).  We provide trend and support lines where necessary.

Just as $100 per barrel was a key resistance point for oil on the way up, it is now acting as key support.  Oil is currently trading below $100 at $99.25, and if it closes below the $100 support level today, the bears will remain in charge for the time being.  Natural gas hasn't quite tested its support level yet.

Oilnat

Bespoke readers surely remember our post a couple of weeks ago highlighting the CEO of Barrick Gold saying he would not hedge gold when it was near $1000, and that it "has a lot of room to run."  He reiterated those statements once again on March 13th.  While he may be right and gold could still rally significantly, if a few days ago was the top, it would sure be ironic.  As shown below, gold has broken one of its shorter-term uptrend lines in recent days, but it still needs to get down to the $900 level to test its longer-term uptrend line.

Goldsilv

Platinum rose a lot more than gold did in recent months, and its decline has been steeper as well.  Because it went parabolic, it has a ways to go to get to the bottom of its uptrend.  Copper, on the other hand, never really got going on the upside, and it recently broke support.

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While other commodities rallied in recent months, orange juice fell.  In recent days, it even took out its lows from last summer.  Coffee has really taken a hit since it peaked in early March.  As shown below, it broke its uptrend as well.

Ojcof

Corn

    

Wednesday
Mar192008

Commodities Take a Beating

While investors have spent the last few days focusing on the events in the financial services sector, commodities have been under heavy pressure.  Much of the focus today was centered on the declines in gold and oil which fell $59 (5.9%) and $4.94 (4.5%), respectively.  Taken as a whole though, the entire sector has experienced a sell-off of record proportions. 

As measured by the CRB Index, the two largest one day declines in the commodity sector (since 1956) both occurred this week.  Below we highlight the ten largest one-day declines in the index as well as the performance of the index going forward.  Fortunately, for commodity bulls, the average return going forward has generally been positive.  At the same time, however, investors who are bearish on the sector are likely to compare the sharp swings to the Nasdaq back in early 2000 (or the equity markets now).

Crb_ten_largest_declines

Even after experiencing its two largest one day sell-offs on record, the CRB index still remains well above its recently surpassed highs from 2006, and year to date the index is up over 8%.

  Crb_index

 

Wednesday
Mar192008

Shorts Take Aim At Merrill

Merrill Lynch (MER) is under heavy pressure today following rumors that the company is set to take additional write-downs and seeking new capital injections.  While additional write-downs are certainly possible, it is hard to imagine that the company would need to raise additional capital after its CEO John Thain said that they have raised all the capital they need.  In a Reuters story published earlier this week, Thain said, "We have carried out an enormous cleaning of our credit portfolio. We have more capital than we need, so we can say to the market that we don't need more injections. We can confirm that we have tackled the problem." 

After last week's Bear Stearns debacle where the CEO said they had ample liquidity three days before the company imploded, we can't imagine why any CEO of a financial services company would say such a thing.  As the last few days have shown us, anything is possible in this market.

Put volume in MER has shown a big up-tick today to 290K contracts, but it still remains below the peak levels we saw earlier in the year.

Mer_stock_and_put_volume