Below we highlight our trading range and P/E charts of the ten major sectors of the S&P 500. The green area in each chart represents two standard deviations above and below the sector's 50-day moving average. When the price moves above or below the green area, it becomes overbought or oversold. Currently, Financials, Consumer Discretionary and Telecom are oversold, while the rest remain in the neutral zone. Two sectors that stand out from a valuation standpoint are Telecom and Utilities. The Telecom sector's P/E has fallen faster than its price, indicating earnings strength. The Utilities sector looks even better, as its price has been rising and its P/E has been falling.
The Nasdaq Composite was down 1.92% yesterday while the S&P 500 was down just 0.06%. The spread between the two indices was the biggest on a Nasdaq down day since January 17, 2003. As shown, the Nasdaq consistently underperformed during the bursting of the Internet bubble. Until yesterday, the two indices had been moving pretty closely together throughout the current bull market.
It looks like Van Gogh is to the art world what sub prime is to the fixed income market. Today, Sotheby's (BID) is down nearly 30% after a weak auction last night where a Van Gogh that was estimated to sell for between $28-$35 million received no bids.
In June, we compared the performance of Sotheby's to the S&P 500 on the hypothesis that strength or weakness in the high end auction market was a good tell for the economy and the market. Let's hope today's decline isn't an ominous sign for the market.
With the S&P 500 having its worst two-day decline since January 2003, we were surprised to see that based on one popular measure of market breadth, the market is still not at oversold levels. This indicates that market internals are considerably better than the indices are telling us.
The ten-day A/D line measures the net percentage of S&P 500 stocks that rise in a given day, and then sums these percentages on a ten-day rolling period. In the chart below, when the line is in the white range the indicator is neutral, when its in the red range the indicator is overbought, and when its in the green the indicator is oversold. Based on this measure, the indicator remains in neutral territory.
At least one Chinese-related ETF is soaring. FXP began trading today and is currently up 11.56%! Unfortunately (not for those who bought it) it's the new ProShares ETF that provides double the inverse returns of the FTSE/Xinhua China 25 Index (FXI ETF).
Below we highlight the price chart of the S&P 500 Financial sector from 1989 to present. We specifically looked at periods where severe declines occurred in the sector to compare them to the current declines. The most comparable period to now would be the 86 day decline in 1998 during the Russian debt crisis. During that time, the sector went down a total of 35% before rebounding to new highs quickly in the Spring of '99. The other period we looked at was the broader market declines during the bear market from 2000 to 2002 in which the Financials dropped 30% over 1,058 days. In the most current period, the Financial sector has taken a beating, but it is still only down 20% from its highs 261 days ago. To reach the bottom that was reached back in October 1998, the Financial sector would have to fall another 18% from here.
When it comes to measuring inflation, rather than focus on the headline number, economists tend to look more at the core reading which factors out the so-called volatile food and energy groups. However, given the growing view that higher oil and food prices are here to stay, some economists suggest that the headline number should be given more attention.
The chart below measures the monthly spread between the y/y headline and core CPI readings. As of the most recent CPI release, the spread between the two increased to 0.7% from -0.1% the month earlier. At current levels, the spread is relatively modest when compared to the historical range. One interesting aspect of the chart is that except for the most recent experience, in every period where the spread widened significantly, the economy subsequently went into a recession.
The sector that has struggled the most thus far this year, Financials, was the sector down the most yesterday as well, falling 5.06%. Materials and Energy followed up Financials on the downside while Health Care and Consumer Staples, both defensive sectors, held up the best.
We sorted the Russell 1,000 by decile based on each stock's YTD performance going into yesterday. When we calculated the average percent change yesterday of stocks within each decile, we found that the stocks that were down the most on the year going into the day were also down the most on the day. This is a result of the continued weakness in Financial stocks that investors continue to dump. As shown below, the decile of the worst performing stocks on the year going into yesterday were down an average of 4.4% versus the overall Russell 1,000 performance of -2.84%.
Below we highlight the 20 best and worst performing stocks in the Russell 1,000 yesterday.
Citi (C) has now been down 7 days in a row for a total decline of 21.74%. Since 1986, this is the 11th time the stock has been down 7 consecutive days. On day 8, it has been up or flat 8 or 10 times for an average overall gain of 88 bps. Since '86, the stock has never been down more than 8 days in a row.
Given the continual increase in write downs for the brokers and banks, we looked to see if investors were increasingly betting against the stocks in terms of short interest. Below we graph the YTD change in price versus the YTD increase in short interest for some of the major players involved in the credit crisis.
While Citigroup (C) and Merrill Lynch (MER) are two of the companies highlighted that have been hit the hardest (both are now leaderless), short interest in the companies has seen only modest increases on a relative basis. As of the end of October, short interest in these two stocks increased by less than Goldman, which is still up on the year.
With the US Dollar index falling even lower today, below we highlight the historical bull and bear markets of the currency. As shown, market cycles for the currency are longer than some of the other asset classes that we have looked at. The average bull market for the US Dollar is 1,710 days long for an average gain of 48.90%. The average bear market is 1,610 days for an average decline of 31.84%. Based on these averages, the current bear market is both longer in duration and more extreme in its decline. Since the current bear market in the US Dollar started in July 2001, currency has declined 37.69%.
Below we highlight a historical price chart of the US Dollar index. As shown, we're currently at record lows. However, the currency isn't nearly as oversold as it has been in the past based on its distance from its 50-day moving average. Currently, the US Dollar is 2.25% below the bottom of it trading range. As highlighted in the second chart below, the Dollar has reached oversold levels of 3% to 4% quite frequently.
There is quite a bit of separation amongst sectors as far as third quarter earnings growth is concerned. Seven sectors have had strong quarters while three have been weak. On the weak side, Financials, Consumer Discretionary and Energy have all posted double digit declines in year over year third quarter earnings growth. On the strong side, Telecom, Materials, Industrials, Health Care, Technology and Consumer Staples have all posted double digit increases (Utilities at 9.4%). These discrepancies leave the total 3rd quarter earnings growth for the S&P 500 at -1.4%.