Below we highlight the Gold/Dollar ratio since 1975. This divides the US Dollar index (DXY) into the price of an ounce of Gold. As shown, recently we took out the prior highs of the ratio made in January 1980, and things have now gone completely parabolic. Things don't stay like this forever, and those who have recently joined the party and entered the long Gold/short Dollar trade should tread very carefully.
The S&P 500 tracking SPY ETF opened down more than one percent this morning after overseas markets fell sharply. We created a scatter chart that plots the percent change in SPY from the prior night's close to the next day's open (opening gap) versus the percent change from the open to the close. In the chart below, we only include opening gaps of -1% or more. When we insert a trendline, it slopes upward from right to left, which suggests that large down gaps have a slight bias towards gains from the open to the close. The historical average change from the open to the close when SPY gaps down 1% or more is +0.45%.
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While the stock market enjoyed a brief rally Tuesday on the heels of the Fed's liquidity injection plan, credit markets (which are the area that needs help the most) were unimpressed. As shown below, while high yield spreads fell on Tuesday, by the time the market closed Wednesday, they were higher than they were Monday.
While Gisele and Jay-Z made the biggest headlines with their public preference for Euros over US dollars, an increasing amount of goods and service providers are now demanding to be paid in Euros. In response to this trend, Airbus parent EADS announced this week that it will require its suppliers to bid for new contracts in dollars. The company's policy is intended to "shift the punishing burden of dollar risk on to suppliers". Talk about an unpopular currency.
Below we highlight the most oversold Health Care stocks in the Russell 1,000. After poor guidance from WellPoint (WLP) and Humana (HUM) in the last two days, many Health Care stocks have gotten crushed. As shown below, 11 stocks out of 95 in the sector are currently trading more than 20% below their 50-day moving averages. HUM is 45% below its 50-day, followed by WLP, PDLI, SEPR, UNH and WCG. It sure hasn't paid to use Health Care as a defensive play in this declining economic environment.
Along with their monthly survey of various economic indicators, Bloomberg also asks economists what they think the odds of a recession are in the next year. Below we highlight all of the responses for each of the past three months. As shown, economists have been increasing their expectations of a recession as the months have passed this year. Back in January, the consensus was looking for a 40% chance of a recession. In February, the odds stood at 51.5%, and this month they ticked higher to 56.5%.
The odds from economists are still lower than the odds that futures contracts are predicting at Intrade. Below we highlight the historical chart of the Intrade contract for a recession along with the consensus economist estimate each month. As shown, traders putting their money where their mouth is have higher expectations than economists do.
Below we highlight the consensus first quarter 2008 GDP growth estimates since March 2007. These estimates are compiled from a Bloomberg survey of 65 economists. This month's survey was released yesterday, and as shown below, economists are now expecting GDP growth to grow at 0.1% in the first quarter. Last year at this time, Q1 '08 estimates stood at 3%, a far cry from the anemic expectations currently in place. As shown, the estimates have declined at about the same pace as the market has.
Bear Stearns (BSC) CEO Alan Schwartz was on CNBC this morning to dispel rumors of a liquidity problem at the company. Mr. Schwartz went on to say that the company's liquidity position remains relatively unchanged since last November.
Following Mr. Schwartz's comments, the stock initially traded higher indicating that his statements were reassuring to investors. However, the gains quickly faded as doubts about the company's counter-party risk remain. One step BSC could (and should) take to help reinforce its stance that it has no liquidity problems is to take some of its liquidity cushion and buy back some stock. With a market cap of less than $9 bln, it wouldn't take much to make a meaningful statement regarding their confidence in the company.
Even though yesterday was the biggest up day in five years, it still shows up as just a blip on the radar when looking at historical charts of the S&P 500 and its ten sectors. As shown below, the S&P bounced nicely off of the bottom of its downtrend yesterday, but it still has a lot of work to do before the chart looks positive again. The same can be said for Financials.
Yesterday's gains also created a short-term double bottom in the Industrial and Consumer Discretionary sectors. There are fortunately three sectors that aren't currently in downtrends -- Consumer Staples, Energy and Materials. And unfortunately for the index as a whole, the Health Care sector exists.
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While yesterday's rally in the stock market may just have been another short covering rally, based on the final short interest data for February (NASDAQ numbers were released after the close yesterday), there may be a lot of shorts to cover. While the short interest ratio (short interest divided by average volume) is one widely quoted measure of short interest, we also track short interest versus a stock's float, as it gives a clearer picture of what percentage of a company is sold short.
In the chart below, we calculate the average short interest of all the stocks in the S&P 1500 as a percentage of the total float of those stocks. As shown, over the last year short interest in the S&P 1500 has risen by over 45% from 6.68% of the total float to 9.93% as of February 29th.
During times when the market is seemingly in free-fall and all your stocks are going down, it is easy to let emotions take hold and lose the proper perspective. In order to help avoid these pitfalls, our Bespoke Market Timing Model analyzes a series of forty widely (and not so widely) followed market indicators to see what they are telling us about the market. For each indicator, going back at least six years, we isolate all of the prior occurrences where the indicator was moving in the same direction and stood at similar levels as it does now. We then calculate how the S&P 500 performed over the next week, two weeks, and month following each prior occurrence. After running the numbers for each indicator, we calculate an overall outlook for the market, which is included in each night's report for Bespoke Premium subscribers.
As shown at the top of this post, on Monday our Market Timing Model hit its highest reading ever (click the thumbnail image to view the report). Historically, high readings in this indicator signify an oversold market where conditions are favorable for a short-term rally. Whenever the model reaches these high levels, all it needs is a spark to get things going, and this morning that spark came in the form of the Fed's liquidity injection plan.
So the next time you feel like stocks are going to fall of a cliff, before making quick decisions, check to see how your emotions compare to what the market is telling you. The Bespoke Market Timing Model is available to Bespoke Premium members on a daily basis.
Today's gain of 415 points ranks 4th on the list of the top positive point days for the Dow. Below we highlight all +300 point days for the Dow. While investors should really look at the daily percentage change for comparison's sake, big up days based on points are significant because of their impact on investor sentiment.
Based on the bounce off the January intraday lows that we are seeing today, technicals suggest a rally to the top of the downtrend line as shown in the chart below. If we can break through that downward channel, it will be a good sign for the bulls (and mark one of the prettiest double bottoms that we've seen in awhile). However, it's still important to not treat this as anything but a rally in a downtrend unless the downtrend is broken.
The average stock in the Russell 1,000 is up 1.75% today. We broke the index into deciles based on stocks' short interest as a percentage of float (100 stocks in each decile) and calculated the average change of each decile on the day. As shown below, the deciles of stocks that are most heavily shorted are outperforming the deciles of stocks with the least short interest. While the differences are not that extreme, it does indicate that short covering can be attributed to some of today's moves. Expect this trend to continue when the market gets bounces like this. With so many shorts out there, it doesn't take much for the skittish ones to run for the hills.
Below we highlight the best performing stocks in the Russell 1,000 on the day. As shown, TMA is up a whopping 50% to just over one whole dollar. CFC and IMB are up more than 12%, and DFS is up 10%. Other notables on the list of today's winners are MOS, WM, MS, FRE, LEH and C.
Three strategists lowered their price targets on the S&P 500 last week. JP Morgan lowered its price target from 1,590 to 1,450, Strategas lowered its target from 1,640 to 1,480, and Merrill Lynch lowered its target for a second time from 1,475 to 1,425.
So far, nine out of the fifteen equity strategists surveyed by Bloomberg have lowered their 2008 forecasts this year. Merrill now has the lowest price target at 1,425, while Goldman still has the highest target at 1,675. Based on the average of all the forecasts, strategists are looking for gains of 21% from current levels to the end of the year.