Tower Private Advisors
- A few modest positives to consider
- Soggy economics
Capital Markets Recap
The Bloomberg talking heads, of course, pointed out that this was the S & P 500′s second week in a row with a lower close, but the other equity indexes above don’t confirm that pessimistic view, with the small- and mid-cap indexes, as well as the NASDAQ recording up weeks. The performance of the emerging markets index–particularly, relative to the Dow Jones Global index, which is dominated by developed markets–reinforces our decision to have favored the same mix: developing over developed.
A key element of technical analysis is positive and negative non-confirmations, a form of which was highlighted above, and its the foundation of Dow Theory, which looks at the action in the Dow Transports versus the Dow Industrials. A low in one that is not confirmed by a low in the other leaves the implication of the new low suspect. A low in both, however, confirms the message of the low. Likewise, one lower grade on your child’s report card isn’t the same as all lower grades.
There was a non-confirmation of sorts today, a positive one. The S & P 500 made an intraday low for the period since July 21 (a date which has no particular significance). The Fear Index, the VIX–technically, the VXO, now–however, did not. The normal relationship is for investors to get more fearful as the market weakens. In that it didn’t, it offers some hope that retreat may stall. In the chart below, I have graphed the S & P 500 (lower panel) against the Fear Index (upper panel), with the scale inverted on the Fear Index. Admittedly, this is a small positive, but it’s in the spirit of Monty Python.
You can see the same effect below, where the Fear Index (read: less fear) is lower now than it was last Friday.
Here’s another positive bit of tid: the S & P 500, in today’s trading, formed what is called in Japanese Candlestick charting, a hammer. Japanese rice traders came up with a unique way of graphing prices back in the 1700s. It lends itself to quick analysis because the implications are quick to see. In the chart below, green represents a day where the close was higher than the open; red, the reverse. The thin line extending (usually) from the red or green box is referred to as the wick, and it displays the intraday action. A quick rule of thumb is this: candlesticks with wicks extending out the top by a fair margin are bad; out the bottom, good. The latter type is referred to as a hammer. It suggests trading where the bears are not able to keep prices down; rather the bulls take over and push them up. (On the other hand, maybe all the bears did high-5s and headed to the beach.) As can be seen inthe chart below, where hammers appeared in the past (dashed yellow), the reaction can be short term in nature, however.
We have a hard time finding pessimism in surveys of sentiment, even thought some market commentators are hanging their bullish views on widespread pessimism. I don’t think it’s widespread at all, but one place where pessimism can be seen is in the ratio of puts (options that benefit from falling prices) to calls (options that benefit from rising prices), the so-called put-call ratio. It’s at levels (shown below, bottom panel, inverted) that have corresponded to rallies in equities. No guarantees about the results this time, but it’s another positive to consider before changing one’s portfolio position to fetal.
- Merger and acquisition activity is heating up this week. Intel said it would buy McAfee, the anti-virus people, because mobile security is going to be hot. Maybe so, but shareholders of acquirers often become former shareholders. INTC is back to its lows of the last 52 weeks. What that means for you, savvy as you are, is that the dividend yield hit a 52-week high, at 3.33%. BHP Billiton offered, ever so kindly, to purchase Potash Corporation of Saskatchewan, aka Potash, for something like $130/share. Although it had closed the night before at $112.77, the company told Broken Hill Partners to, well, go pound sand. At almost 38% below its all-time, 2008 high of $241.62, company management thought it was worth more, and the market seems to agree, having sent the shares to $149.65. Biomedical company, Stryker Corp., is said to be buying a unit of Boston Scientific, a stock that exemplifies the risk of buying stocks off the 52-week low list, where it seems to have taken up permanent residence. Warren Buffett’s Berkshire Hathaway took a stake in Fiserv, a provider of services to the financial services industry, and upped its stake in Johnson & Johnson. That’s sort of like buying a bond. The stock yields 3.43%, and from end-to-end–like a 10-year end-to-end–the price really doesn’t change much. This, however, is a bond with a rising yield, as evidenced by the chart at right of the stock’s per share dividend. Berkshire Hathaway, however, enjoys another benefit that you don’t, in that it can consolidate its equity portion of JNJ’s earnings into its own income statement. For reference sake, JNJ’s 3-year bond maturing in 2013 yields 1.18%, while its 13-year bond yields 3.41%!
- Speaking of dividends . . . every once in a while some firm wants us to test drive their research or other service. We just started seeing stuff from Harris Bank, which looks interesting. They had a note out the other day on Pfizer, a stock they seem to love. It didn’t show up in last week’s short list of stocks with juicy dividends for some reason. It does, however, sport a 4.52% dividend yield, and this is what Harris says about it (they’re referring to selling Eli Lilly (LLY) in favor of it). (Seven exclamation points in one paragraph, however, is a bit silly, in my opinion.)
Economic data this week was mixed, relative to the prior releases of each. Only two exceeded economist estimates. The MBA Mortgae Applications index, which rose by 13%. It was entirely on the basis of Refis, as purchase applications fell to a 14-year low. The NAHB Housing Market Index–a measure of homebuilder sentiment–fell to 13. Its high was 22 on May 31, and it’s now retraced more than half of its improvement from its January 2009 low of 8. Housing Starts and Building Permits both continue to look sickly. There were a couple of shockers this week. The first, if for no other reason than for the big number, was Initial Jobless Claims, which rose to 500,000, for the first time since November 2009. What’s more, the four- and 12-week accelerated upward, the former moving above the 50-week moving average.
The Philly Fed fell sharply, and that seemed to jolt Thursday’s markets. Whereas the economic solons had expected a rise from 5.1 to 7.0, the index fell to (-)7.7. That takes the index back to July 2009′s level. The index fell to an almost perfect 50% Fibonacci retracement of the move from the 2008 low to the 2010 high (below). Also, it seems that the Philadelphia area manufacturing economy was just catching up with the drop in the Empire State Manufacturing index, which is also shown in the chart below.
Key indicators to watch
- Existing Home Sales (July) – Tuesday
- New Home Sales (July) – Thursday
- House Price Index (June) – Thursday
- Initial Jobless Claims (weekly) – Thursday
- Gross Domestic Product, Q2, second revision – Friday
- University of Michigan Consumer Confidence (August, final) – Friday
Graig P. Stettner, CFA, CMT
Vice President & Portfolio Manager
Tower Private Advisors