The S&P 500 is up 4.50% over the past three days. This marks the largest 3-day gain the index has seen since March 19, 2003. Below we highlight 3-day gains of 4% or more since the bull market began in October 2002. You'll notice that many occurences came on consecutive days as most often the majority of the gains were heavily weighted to one day of the three day period.
With the S&P 500 tracking Spyders (SPY) trading down 140 bps in the pre-market, we looked at similar gaps in the ETF to see how it typically trades from the open to close on these days. Below we break down the gaps at different price points to see if the market usually reverses the gap or continues the trend. As shown, the more the ETF gaps down, the more likely it is to reverse and go higher from open to close.
Because we are bound to gap up again at some point, we have also included the average open to close change on positive gaps as well.
Futures are sharply lower this morning once again on concerns regarding liquidity in the credit markets. However, a look at spreads in the high yield corporate bond market yesterday shows that investors were warming back up to the sector (at least temporarily). The spread between interest rates on high yield corporate debt versus yields on treasuries declined by over 6%.
Red lines in the charts above indicate periods where high yield credit spreads were in a widending.
From a not-so-great, great movie: "You guys won today. You guys won yesterday, so that's two in a row. If you win again tomorrow, that's called a winning streak. It has happened before" - Major League II.
The S&P 500 has put together a 3-day winning streak of 4.5% so far this week. With the exception of Telecom, equities were up across the board. Fixed income suffered at the hands of stocks, and the commodities tracking ETF, DBC, was also down.
Earlier today, we highlighted the stocks in the S&P 500 with the highest estimated growth rates. In our second list of the day, we highlight stocks in the S&P 500 with the lowest estimated P/E ratios (based on estimates for the next year). As shown, financials and energy make up the bulk of this list, although we'd caution that estimates for financials have not changed yet even as deals have recently dried up.
If you've been thinking that the market has been a bit tempermental lately, you are not mistaken. Since reclassifying the groups in the index in late 2001, the market has never been this hot and cold. In the chart below, we calculated all of the days where all of the industry groups in the index were either up or down (all or nothing). Through yesterday, 15 of the last 50 days (30%) were all or nothing (8 days where each group was up and 7 days where each group was down).
Since most of us spend time focusing on economic indicators and their impact on the market, sometimes it helps to take a step back and see how the overall picture is shaping up. To do this we follow a series of over 30 regularly released indicators dating back to 1998 and track how the actual report at the time stacks up against the consensus forecast. (For more information on our database of economic indicators and how each report has impacted the market, click here.)
We then add up all the results of the last 50 trading days to create an economic indicator Advance/Decline (A/D) line. This enables us to easily spot any general trends. The chart below compares the YTD economic indicator A/D line (red line) with the S&P 500 (blue line). One interesting aspect about the chart is that in both instances where the S&P 500 ran into trouble this year (February and now), the economic indicator A/D line was near a short term peak, reinforcing the point that while the market likes economic growth, it becomes apprehensive when growth becomes too strong.
Throughout the day, we'll be posting on stocks in the S&P 500 that have some of the best valuation measures and growth rates. For our first post, we highlight the 25 stocks in the S&P 500 with the highest estimated long-term growth rates. This number is based on the consensus estimated annual growth rate over the next five years. As shown, the technology sector is well represented in this list, and it includes key names such as GOOG, AMZN and EBAY.
Back on July 25th, we highlighted that earnings reports were beating estimates 62% of the time this quarter - about inline with the average over the past 10 years. Since then, however, earnings beats have picked up to 67%, which is higher than the prior two quarters and above average for the long term.
Back on July 23rd, just before the recent correction in equity markets, US strategists (based on Bloomberg's weekly survey) had a year-end S&P 500 price target of 1,599. That was a modest 3.75% above the index's actual price level on 7/23. AG Edwards and UBS had the highest price targets at 1,650, while JP Morgan was the only firm to have a price target below that of the index at the time. Since 7/23, only Merrill Lynch has lowered their estimate from 1,625 to 1,560 (Merrill's outlook is also for the next 12 months). This has caused the consensus estimate to drop only slightly from 1,599 to 1,594. Based on these numbers, analysts are at the moment expecting a gain of 7.94% by the end of the year.
Even after the two-day gains in the S&P 500, the index remains in oversold territory, although not at the extreme levels we saw at the end of last week. The chart below highlights the trading areas of the S&P 500 along with its 50-day moving average and current price. When the index moves in or below the green shading, it is considered oversold (overbought for the red shading).
One sector that has done extremely well in the last two days is Consumer Staples. As shown by the trading area chart below, it has now moved back into overbought territory.
We do an in-depth analysis of the ten US sectors twice a week in our Sector Snapshot available to Bespoke Premium subscribers. We also analyze the ETFs that follow these sectors as well as many other assets in our daily ETF Trends report. Sign up now at Bespoke Premium to begin receiving these insightful, unique reports.
Up until a few weeks ago, we read several stories describing the trading pattern where the S&P 500 has rallied on Fridays as investors anticipate merger announcements on Monday morning. However, looking at the chart below, so far this year, and especially in the last three months, Fridays have been negative days for the market. This year and over the last three months, the only two days where the market has averaged positive returns is Monday and Wednesday.
Looking back at the market's average daily performance since 1928 shows a different pattern. Since then, the only day of the week where the market has averaged negative returns is Monday, while Wednesday is typically the S&P 500's best day of the week.
Back on July 30th, we highlighted that the prediction markets over at Intrade weren't trading inline with Fed Futures that were forecasting an 80% chance of a rate cut by the end of the year. At the time, the Intrade contract for the rate to be on or over 5.25% (where it currently is) was only factoring in a 20% chance of a cut (trading at 80 in the 7/30 chart below).
Currently, Fed Futures are forecasting a nearly a 100% chance of a rate cut by year end, and while the Intrade contracts have come in significantly since our last post, they are still only factoring in a 60% chance.